Picked up a friend's check. Since unsealed, I took a peak and what I saw baffled me. Her total state and federal totaled 0. the status of (fed/state) said Don't Withhold. The only deductions were for ss and medicare... How? She makes 40,000 a year.

Your friend must file tax return. If any tax is due she must pay it with interest and penalty.

If no tax was withheld, that does not mean that she will not have to pay tax.

It is possible that her personal circumstances results in her owing NO income taxes. If she can show this on the previous year's return, she can apply to be EXEMPTED from income tax withholding.

This happened to me in the early 1980s when I was a captain in the Army. I had several children who required day care while my wife attended nursing school. Even though she had no job, her school attendance allowed us to claim the Child Care Credit. Combine that with a house payment, IRA contributions and the multiple exemptions that go with having three children, in 1982 I owed ZERO income taxes.

Recognizing that I could put the money to better use than lending it to the U.S. government interest-free, I then got exempted from withholding for the following three years.

Depending on his exemptions and tax filing, he may claim enough dependents or have other business losss to off set it.