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Is it better to have less taxes taken out of your paycheck, but pay taxes at the EOY? Or to take more taxes out so you don't pay at EOY?

Hello, I understand that on the W4 the lower the "allowances" you have the more taxes get taken out of your check and thus you get less take home pay, but will owe less takes at the end of the year. On the flip side if you have allowances then you get more money in your check but will owe more taxes at the end of the year.

Is this just a matter of preference or is there a benefit to doing one or the other?

5 Answers

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  • 1 year ago
    Favourite answer

    As long as you have enough taken out so you don't get a penalty for underpayment, it is a matter of preference. Some people use it as a forced savings plan so they get a large refund in February-March for some purpose.  They presumably don't have the self discipline to deposit the same money in a bank account each paycheck and can't arrange for automatic payroll deduction to do it. (or automatic transfer from checking to savings if they have a checking account). 

    There are 2 drawbacks to the large refund.  They could have gotten some interest on that money.  These days that is not a big deal, but every dollar helps.  The other drawback is that you can't get your refund until some time in February at the earliest. By depositing the money in a bank account instead you would have the same amount (plus whatever interest) at the end of December, several weeks earlier.  Also, if you had an unusual expense, you could use the bank account as an emergency fund instead of charging it and paying credit card interest.  Just remember the self discipline required.

  • 1 year ago

    It's best to try to break even. This isn't easy to do, so the next best thing is to owe a little. You want to keep the tax bill below $1,000 because above that, the IRS starts to take a closer look and if they decide you underpaid the previous year, there can be a penalty.

    The reason it's better to owe than to get a refund should be obvious to everyone but unfortunately it is not. You are not only getting the full use of your money as you earn it, the government is giving you an interest-free loan every paycheck, all year. A refund is 100% the opposite; they keep your money all year and then give it back to you without interest. And to think that people pay interest on top of it with these 'refund anticipation' loans from the big tax preparation companies.

  • Marvin
    Lv 7
    1 year ago

    There is a penalty if you lie on your W4 and do not have enough taken out, then try to pay it at the EOY. I think the penalty is $500. I might be telling you out of date info, so it is possible that the amount is more now.

  • ?
    Lv 7
    1 year ago

    It is better to break even, or a small refund.

    Your tax debt is the same no matter what is withheld. It is a matter of what you have to pay or get refunded when you file.

  • 1 year ago

    The benefit to more allowances is that you get the money sooner and can deposit it in the bank and earn interest.

    But you'll probably spend it. One benefit to fewer allowances is that you won't be tempted by the money and won't be able to spend it until the end of the year.

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