W-2 withholding. If you aren’t sure what I’m talking about yet or you’ve never had the privilege of filling out a W-4, let me set the scene. – You just started a new job, you walk into HR and the person behind the desk hands you a bunch of legal paperwork to fill out and a W-4? After looking at it blankly for a period of time, you have no idea what to put. 1, 2, wait, I can put a 0? What the heck does this even mean!? You look up at the HR person and say “uhh… I have no idea what I should put. Can you help me out here?” Without taking their gaze off their computer screen they say “Just put zeros for everything”.
Their advice, on average is pretty good, but no one knows why and in a lot of situations is the safe thing to say but not always the right thing to say. No matter what you have on your W-4 right now, it might be time to take a look at it and change it. Have you been getting back high refunds every year or have you been paying extremely high tax liabilities every year to the IRS?
Some people feel it is fine to get a large refund at the end of the year but it isn’t a financially great decision. What they are doing is tying up their money in the government for a year until they get their refund. They could have been using that money but instead, the government sat on it, made interest on it for a year and laughed. If you had the choice, wouldn’t you rather have that money to spend, or save every month? I know I’d like to see less taxes taken out of my paycheck every 2 weeks!
On the other hand, some people don’t have enough taxes taken out of their paycheck and at the end of the year they owe a lot. This can be a problem for many reasons. What if you spent all your money and don’t have enough to pay your tax liability? You may need to pay interest on the taxes you didn’t pay. The IRS can hit you with penalties at the end of the year if you hadn’t been making your tax payments. If you have to pay interest and penalties you are, essentially, forking over money to the government at that point and have nothing to show for it.
It’s almost the end of the year. Take a look at what happened last year at tax time. It might make all the financial sense in the world to change your W-4 withholding. Not sure what to change it to? Well, the IRS has a withholding calculator that can tell you what you should put. Fill this out and bring your newly found information to your HR person and start taking control of your life! Don’t let the government take what they shouldn’t have!