What Happens If I Claim Exempt on My Bonus Check?

Claiming “exempt” on a Form W-4 for a bonus pay period is a way to maximize immediate cash, but this action is governed by strict Internal Revenue Service (IRS) rules. This move carries financial consequences, as an incorrect claim can lead to a future tax bill and penalties. Understanding these regulations is essential before altering your tax withholding.

The Immediate Impact on Your Bonus Check

Submitting a Form W-4 with an “exempt” status instructs your employer to stop withholding federal income tax from your pay. For a bonus payment, this results in a larger check because no federal income tax is taken out. The IRS considers bonuses supplemental wages, often subject to a flat 22% withholding rate if paid separately and under $1 million. Claiming exempt temporarily halts this specific withholding.

Claiming exempt status does not stop all tax deductions. Federal Insurance Contributions Act (FICA) taxes, which fund Social Security and Medicare, are unaffected by your W-4 elections. Your employer will still deduct 6.2% for Social Security on income up to the 2025 limit of $176,100 and 1.45% for Medicare on all your earnings, including the bonus. State income tax withholding may also continue, as state withholding forms and rules operate independently of the federal system.

Eligibility Rules for Claiming Exempt

The ability to legally claim exempt from federal income tax withholding is narrowly defined by the IRS. To qualify, you must meet two conditions. First, you had no federal income tax liability in the prior tax year, meaning you received a full refund. Second, you must reasonably expect to have no federal income tax liability in the current year.

These rules mean that only individuals with very low incomes can qualify. For most full-time employees, a bonus is taxable income that creates a tax liability for the current year, making them ineligible to claim exempt. When you sign Form W-4, you do so under penalty of perjury, affirming you meet the required conditions.

Year-End Tax Consequences

Claiming exempt on a bonus check only defers your tax obligation; it does not eliminate it. The full bonus amount is taxable income that must be reported on your annual tax return. By not having taxes withheld, you will have underpaid for the year, resulting in a smaller tax refund or a tax bill.

Failing to withhold enough tax can trigger an underpayment penalty from the IRS. The penalty applies if you owe more than $1,000 in tax after subtracting withholding and credits. To avoid it, you must pay at least 90% of the current year’s tax or 100% of the prior year’s tax, whichever is smaller. For higher-income taxpayers with a prior year adjusted gross income over $150,000 ($75,000 if married filing separately), you must pay at least 110% of your prior year’s tax. The penalty functions like interest on the underpaid amount.

The Process for Adjusting Withholding

To change your withholding to exempt for one pay period, you must submit a new Form W-4 to your employer. You would write “Exempt” on the form in the space below Step 4(c). Submit this form before the payroll processing deadline for your bonus to ensure the change takes effect.

After the bonus is paid, you must immediately submit another new Form W-4 to revert your withholding status. If you fail to do so, your employer will not withhold federal income tax from your subsequent paychecks. This second W-4 should reflect your accurate tax situation to ensure proper withholding for the rest of the year.