Proper employee classification is more than a technical detail; it’s a requirement. In Paylocity HR and Payroll, switching an employee's classification from nonexempt to exempt is more than simply a settings adjustment; it should align with federal labor regulations, especially the Fair Labor Standards Act (FLSA). This ensures compliance with overtime standards, payroll practices, and recordkeeping requirements.
In this article, we will discuss everything you need to know about claiming exempt status on Paylocity. We will be going over what 'exempt' means and how to update your tax withholding information in the system.
When you choose ‘Exempt’ on a payroll software system such as Paylocity, you are telling your employer not to withhold federal income taxes from your paycheck. This status is only applicable if you fulfill the Internal Revenue Service (IRS) standards, which generally include:
- You had no federal income tax liability in the last year
- You expect to have no tax liability in the current year
It is important to understand that claiming exemption does not exempt you from social security or Medicare taxes, nor does it impact state or local tax withholding, which can have different regulations.
Before you update your Paylocity settings, you need to make sure that you are eligible to claim the exempt status. The IRS states that you can only claim an exemption if you owed no federal income tax in the previous tax year and you expect to owe no federal income tax in the current year.
If you wrongfully claim exempt status, you can face tax penalties when you file your return. In case of doubt, you can contact your human resource (HR) department or seek help from a tax specialist/consultant.
There are three tests used to assess whether your role qualifies for exempt employee status.
- Salary Basis: Makes sure that an employee is getting paid a fixed amount every week, regardless of the number of hours work
- Salary Level: Confirms that an employee's weekly pay is at least $684
- Job Duties: Ensures that an employee's job duties are consistent with their exemption status, such as administrative, professional, and executive positions
To get started with the process of updating your exempt status, here is what you need to do:
Step 1. Logging In
First of all, you need to go into your Paylocity account. This can be done using either the official Paylocity web portal or the mobile app:
- Open the login page
- Enter your username and password
- Go to your employee self-service dashboard
If you do not have your login credentials or are having difficulties accessing your account, you can contact your HR or payroll department for assistance.
Step 2. Accessing The Tax Withholding Settings On Paylocity
After logging in, follow these steps to find your tax withholding information:
- Look for the ‘Pay’ icon or tab from the home screen, usually represented by a dollar sign ($) or labeled as ‘Pay’
- Click on ‘More’ or the menu option that expands additional payroll-related settings
- Select ‘Tax Withholding’ or W-4 Information to access your federal tax withholding form
This section contains your current tax withholding elections, including your filing status, number of allowances, and exemption status.
Step 3. Updating Your Tax Withholding To Claim Exempt
To claim exempt status on Paylocity, you need to update your federal tax withholding form (W-4) as follows:
- Click ‘Edit’ or ‘Update’ in the Tax Withholding or W-4 information section
- Look for the option or checkbox that lets you claim exempt status. This is usually found in Step 4(c) of the W-4 form, where you can write 'Exempt' if you meet the criteria
- Check the box indicating exempt status or enter ‘Exempt’ in the designated field
- Ensure that no other allowances or additional withholding amounts conflict with your exempt claim
- Save or submit the updated form
After submission, Paylocity will process your request and adjust your federal income tax withholding accordingly.
Step 4. Verifying Your Exempt Status
It's a good idea to verify if your exempt status has been accurately applied:
- Check your next paycheck stub to confirm that federal income tax withholding is zero
- Recheck the ‘Tax Withholding’ section in Paylocity to verify that your W-4 form reflects your exempt status
- Immediately contact your HR or payroll department if you see any discrepancies
Step 5. Changing Or Revoking The Exempt Status
Your tax status may change during the year. If you no longer qualify for exempt status, you need to update your Paylocity W-4 form to reflect your new tax withholding preferences:
- Log in to Paylocity and go back to the ‘Tax Withholding’ section
- Edit your W-4 form
- Remove the exempt claim by entering your filing status and allowances or completing the form according to your current tax situation
- Save the changes
Failing to update your exempt status when required can result in under-withholding and potential tax penalties
- Consult A Professional: If you are unsure whether you qualify to claim exemption, contact your HR department or talk to a tax advisor
- State Taxes: Remember that exempt status on federal withholding does not automatically apply to state or local taxes. Check your state’s requirements separately
- Social Security And Medicare: Exempt status only affects federal income tax withholding. Social Security and Medicare taxes will still be deducted from your paycheck
- Review Annually: Tax laws and your personal financial situation can change anytime. Review your withholding status at least once a year or after major life events like marriage or having a child
Getting ‘Exempt’ on Paylocity is more than just turning a switch; it's about complying with labor laws. Ensuring that employees are properly classified not only reduces risks but also reflects a company's commitment to fairness and compliance.
By understanding the legal benchmarks and using Paylocity's built-in tools, HR professionals can confidently manage exempt classifications and maintain accurate payroll practices.