Here’s a Quick Way To Boost Your Weekly Paycheck
Don’t Withhold more Tax Cash Than You Need To
There is a common saying that only two things are certain in this life: death and taxes. While we have little control over the former, the latter is something we can manage despite its inevitability. As income is earned, an approximate amount of taxes is withheld from each paycheck, in part to eliminate the need for cutting a hefty check come tax filing time each year. While the pay-as-you-go tax system works well in that regard, the sting of tax withholding can create a cash-flow pinch month to month. Fortunately, the majority of payroll systems allow you to control how much is being withheld from your earnings for Uncle Sam.
The W-4 Confusion
Anytime you start a job with a new employer, part of the sometimes overwhelming amount of paperwork required is the allusive W-4 – an IRS form that indicates to your employer the rate of tax withholding that should apply to each earning period. The W-4 form requires you to place a number in the “allowances” section, which affects how big, or little, your paycheck will be after taxes are accounted for. For instance, writing 0 in that section means your employer will calculate your tax burden as a higher percentage, as they assume you have a greater need for tax withholding. Conversely, claiming seven (yes, you can do that) allowances results in less taxes withheld from each paycheck, due to an assumption that you have more deductions.
For the majority of individuals who are single, have no children, and only work a single job, claiming 0 or 1 allowance on the W-4 generally results in the right amount of taxes withheld throughout the year. However, for individuals with more complicated financial lives, the W-4 and the number of allowances claimed can have a negative impact on cash flow. This is because having too few dollars withheld, by claiming a higher number of allowances, may result in a tax bill at the end of the year, while claiming too many results in a hefty refund.
The Refund Myth
The average federal tax refund for U.S. taxpayers in 2015 was $3,120, a slight increase from the average $3,116 in 2014. It is common for individuals to use this cash in-flow for paying down debt, taking a family vacation, or completing a long-awaited project around the house. While it is often perceived as helpful to receive a few thousand dollars as a lump sum each spring, there is an inherent flaw with getting a tax refund each and every year.
On average, individuals who receive a tax refund have between $240 and $250 extra withholding per month, resulting in a lower paycheck. Those funds are, essentially, loaned to the federal government throughout the year, instead of being used for your own monthly expenses, building up an emergency savings or saving toward retirement. The biggest concern with over withholding, though, is that you have no opportunity to earn interest on the money you worked so hard to earn. The government is able to use your excess cash for whatever it deems necessary – and you get no benefit for being the lender.
Tools to Manage Withholding
If you’re at or near a breakeven with taxes, meaning you neither owe nor receive a refund, there is no need to adjust your W-4 allowances. However, if you receive a substantial refund (or owe a substantial amount) each year, it’s probably time to examine your W-4. Start with your HR department by simply asking for a new withholding form and complete it as you see fit. If you’re not sure the ideal allowance to claim, the W-4 comes with instructional worksheets to help you determine the most appropriate number based on your financial situation and tax filing status. If the instructional worksheets are not included, the IRS makes those forms as well as a withholding calculator available online. Updating your W-4 is one of the simplest methods to getting a bigger paycheck, without the need to earn additional income.
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