What's the maximum number of exemptions I can claim to have no withholding? If I find that my withholding so far this year puts me in prior year safe harbor, then it is not necessary to withhold any more tax. Can I claim like 1,000,000 exemptions on federal W-4 and California DE-4?
Yes, if you have $3.7 billion dollars of earned income that shouldn't be taxed you might consider this. You might, instead, do the math and take your yearly income after payroll tax and retirement deductions and divide by $3700 to get that magic number that has far fewer zeros.
My payroll software caps the exemption amounts at 99. So if I were to get a W-4 with 1,000,000 on it, I'm entering 99. If I feel like it.
FWIW: Circular E, the withholding tables from the IRS max out at 10. But that doesn't mean anything.
I suggest you read the warnings on the back of the W-4 you must sign to decrease your withholding. It refers to CURRENT tax, not last year's safe harbor .Not that the IRS will search for this to fine, but reducing withholding to less than current tax is prohibited.
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Where does it say that? The only thing I see is
Purpose. Complete Form W-4 so that your employer can withhold the correct federal income tax from your pay. Consider completing a new Form W-4 each year and when your personal or financial situation changes.
Exemption from withholding. If you are exempt, complete only lines 1, 2, 3, 4, and 7 and sign the form to validate it. Your exemption for 2011 expires February 16, 2012. See Pub. 505, Tax Withholding and Estimated Tax.
The first paragraph just says this form is to state what is the correct amount to withhold, but it doesn't define what "correct" is. Correct means whatever is valid according the the laws. I searched the pdf for "current" but found nothing.
If you have a Schedule C business you can easily making use of prior year safe harbor by making 4 equal payments adding up to 110% of last year's total tax even if you made $3.7B this year. So why can't W-4 employees have this privilege?
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