Learn how to set up tax exempt employees in QuickBooks Desktop Payroll.
It is almost never correct to remove a Federal or State tax from an employee's record. Here are the following situations where it is correct to exempt an employee from Federal or State tax or State selection on their record:
The employee lives or works outside of the US.
The employee has a special status.
The employee is working in a U.S. protectorate such as Guam.
The employer has a special tax-exempt status.
Many employers make the mistake of removing a tax from the employee record when they shouldn't. Doing this incorrectly causes significant "downstream" problems that affect reports, tax forms, tax calculations, and liabilities due.
Common reasons why employers mistakenly remove a tax from an employee's record
The tax is company-paid.
The tax rate is 0%.
The employee claims "exempt" status.
My state doesn't collect this tax.
The employee paid the tax while working for a previous employer this year.
I don't think I owe this tax.
The company has agreed to pay a tax that is usually paid by the employee.
Follow the steps below to set up a tax exempt employee in QuickBooks Desktop Payroll.
Note: You must set up each exempt employee individually. You can't set up the company file as exempt from Federal and State taxes.
- Go to the Employees menu, then select Employee Center.
- Double-click the name of the employee.
- Go to the Payroll Info tab.
- Select Taxes....
- Go to the Federal tab. From the Filing Status drop-down, choose Don't Withhold.
- Go to the State tab. From the Filing Status drop-down, choose the appropriate option. (The option will vary by state. You may see Don't Withhold, Exempt, or a different choice. If there's no Filing Status drop-down, your state is not subject to state withholding.)
- Select OK twice to save your selections.
- Repeat these steps for each exempt employee.