Exemption

On a paycheck, exemption usually means claiming exempt from federal income tax withholding on Form W-4. Your employer then withholds no federal income tax, though Social Security and Medicare still come out.

You can claim exempt only if you owed no federal income tax last year and expect to owe none this year. The claim lasts one calendar year, so you must give your employer a new W-4 by mid-February to keep it. Claim it when you do owe tax and you will have a bill, and possibly a penalty, at filing time. See how much federal tax should be withheld.

The word has two other meanings. A personal exemption was an amount per person that came off taxable income, and it has been zero on federal returns since 2018, though some states still use one. An exempt employee is a salaried worker who does not get overtime under federal wage law. For state forms, see withholding allowance.