Check the Exclude box on the Employee Withholdings screen in the following situations ONLY:

  1. To temporarily turn off General Withholdings you create such as employee child care, etc. The withholding will be skipped for any paychecks issued to this person until you return and uncheck the box.

    Warning! If you “exclude” a federal or state withholding (income tax, Social Security, Medicare) the taxable earnings (and W2) will be affected. The person’s gross pay will not count toward taxable earnings for either employer or employee paid taxes AND the earnings will not be reported on the W2. In other words, neither party will pay tax on those earnings. This is almost ALWAYS WRONG.
    See: How to handle employees who claim “exempt” on form W-4.

  2. To permanently exclude a withholding. Used when neither the employee nor employer pay any amount for that person and the earnings are not to be reported on the W2. Talk with your tax advisor before using the “Exclude” checkbox.