Have you ever looked at your paystub and tried to figure out where you can cut something to give yourself a little extra? Those health insurance premiums are high, but it’s too risky to lose. Your teeth aren’t really that bad, are they? Couldn’t you go a while without seeing the dentist? What about that pesky 401k? You won’t see the funds for a while, so why not take more home today?
These thoughts have likely crossed all our minds at some point. I am here to offer another solution that most people don’t seem to know about—your tax withholdings. There’s a very good chance that you completed a w-4 tax form when you first started with the company and then forgot all about it until this article. The w-4 form is simply telling your company how much tax to withhold from your paycheck each cycle. No, you likely didn’t specify a number, but you followed a formula to stay within a certain range for each paycheck.
If you get a big tax refund each filing season, one way to look at that is to say you’re getting an annual bonus and can go on a spending spree. Some of us would look at a big refund, however, and think we’ve let the IRS have too much of our money throughout the year on an interest-free loan. What I mean is you’ve allowed the IRS to take more money from each check than they should, and the return the overpayment to you at tax time. Did the IRS pay you interest for holding onto your money for any length of time? NOPE! After all, there is a really good chance that you can spend your hard-earned money better than the government can.
So, how do you remedy this situation? Your company must allow you the opportunity to change your w-4 withholdings. After all, maybe you started as a single person and now you’re married and have 2 children. Each life change requires a visit to your w-4 form.
Most people I speak to about this are simply allowing too much tax to be withheld each paycheck. They don’t check the “exempt” box(which I wouldn’t recommend checking in most cases), but they check a few boxes, put in a couple numbers, and they’re done with it. But I recommend everybody do a little trial-and-error, change the numbers around, and see what happens over a few paychecks. Your tax advisor can help you here as well. For example, most married people check that they’re married and file jointly, and ignore the part about dependents or changing the specific withholding. If the line item asks how many dependents you have, then a higher number means less money held in taxes. If the line item asks for an dollar amount to withhold, then a lower number means less taxes withheld. You need to look at the form provided by your company to know what to do because they don’t all look the same.
As I mentioned above, there is also going to be a little box that says “exempt.” If you check this box, then $0 federal income tax is going to be withheld from your next check. You’ll still have things like social security and Medicare and maybe a few others, but the line item that says “Federal Income Tax Withheld” will be a big, fat 0. You can do the same thing on the separate w-4 form for your state income tax. Everything I’ve been saying is specific to your Federal Tax Withholdings, by the way. State is separate.
When does it make sense to use this idea if you aren’t trying to keep it permanent?
If you want to adjust your withholdings temporarily, my favorite time to use it is when you’re about to get a bonus/commission check. Why? Because bonus checks are taxed close to 50%, no matter what your normal withholdings are. So, even if you’re normally taxed at 10%, your bonus check is going to be pillaged before you see it. That can be a major discouragement if you’re expecting a nice commission. If you work in sales and earn commission, I’d definitely consider using this idea.
The other major situation is if you have a temporary emergency and need more take-home pay. Maybe you have a major unexpected bill and need to make extra payments towards something. You can adjust the w-4 and switch it back whenever you want.
Why wouldn’t you take your withholdings down to near or at 0?
I wouldn’t suggest doing this because you will owe taxes during the next filing season. The IRS is going to get their money sooner or later. If you pay no taxes throughout the year, you’ll get a tax bill at filing time. If you’re used to getting a refund, that is going to be a major shock to your system that you won’t be too thrilled about. So, if you’re happy with the amount of refund/liability you have each year, try to keep your w-4 as consistent as possible.
Is this illegal? Will I get in trouble for doing this?
No, there is nothing wrong here from a legal or company standpoint. You are within your legal right to make changes to your tax withholdings. Plus, the tax liability is going to be corrected at your next filing season anyway. So, it doesn’t matter if you’re having too little or too much tax taken out of each paycheck—it’s going to get corrected. Also, I doubt anyone at your company will have any idea you’re even changing anything unless it’s a small company with an employee who is involved with every change. Big companies are all automated with things like this.
