Exemption from withholding refers to the ability of an employee to not have any federal income tax withheld from their paycheck. This is done by filing as exempt on Form W-4, which tells the employer how much federal tax withholding and additional withholding is needed from the employees paycheck. To be exempt from withholding, two conditions must be met: the employee owed no federal income tax in the prior tax year, and they expect to owe no federal income tax in the current tax year. If an employee qualifies for exemption from withholding, they can use Form W-4 to tell the employer not to deduct any federal income tax from their wages. However, filing for exemption from withholding does not mean that the employee will pay any less in taxes. If they owe taxes but file as exempt, they will have to pay the full tax bill when they file their taxes next year, and the IRS can charge additional penalties for failing to withhold. It is important to note that filing as exempt only applies to federal income tax and not to Social Security or Medicare tax.