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Payroll withholding is something every taxpayer needs to get just right. Why?
- If you have too little taken out of each paycheck, you’ll owe money when you file your return. Ouch!
- If too much money is withheld, you’ll get a refund.
What’s wrong with getting a refund? You’ve given the IRS free use of your money, which you could have put to better use yourself throughout the year.
For example, you could earn interest in a high-yielding certificate of deposit. Compare CD rates at Bankrate.
The best course, tax experts say, is to adjust your withholding so your tax payments in our pay-as-you-earn tax system will match your actual tax liability.
How to get it right
To make any change, file a new form W-4 with your employer. This will change the amount that comes out of your paycheck.
If you owe the IRS:
- Decrease the number of personal allowances on your W-4.
- Or, simply ask that a set amount be taken from each paycheck. To figure out how much, take the amount you owe and divide it by the number of pay periods remaining in the current year.
If you regularly get a big refund:
- Increase the number of personal allowances.
- The adjustment will give you a bit more cash in each paycheck. Don’t just spend it, but open an account — savings, money market or CD — that will earn you, and not the federal government, interest.
Take a fresh look when things change
You should adjust your withholding any time there’s a major change in your life — such as if you marry, welcome a child into your family or buy a home. Each of these circumstances can affect the amount of tax you’ll owe.
See how the number of allowances affects your take-home pay with Bankrate’s hourly paycheck calculator.