by Andi B.

Since I recently reacquired employee status, I had to fill out my W-4 to determine how much would be pulled from my paycheck. It’s a simple exercise, but something most people set and forget. I make sure that I give the IRS only what they require. A lot of people I know take the opposite approach and try to have as much withheld as possible so they get a big refund to “put into savings each year.”
Why I Disagree
Even though savings interest rates are small, I still manage to get 1%. Even if it’s only an extra $20, I would rather take my husband out for a beer. But I do understand that savings is hard and it’s easier to save money you never touch.
How You Can Make It Work
The key that most people need is not having access to that money. If you have direct deposit, set it up so that a certain amount or percentage goes immediately to a savings account like ING that requires a minimum two day transfer. In most cases, if it takes time to access, you’ll think multiple times before spending it.
The Fear Factor
I think fear is also a great motivator for extra withholding. Of course, no one wants to aggravate the IRS, and no one wants to end up owing money. The concept of being penalized come April can be frightening enough to make sure there’s an extra cushion.
Finding the Right Number
So how do you figure out how much should be withheld? You should ask the IRS themselves. You can find a withholding calculator on the IRS website that will allow you to determine how much you should be paying.
The Time is Now
Since it’s December, it’s a great time to assess your withholding. It will allow you to correct any mistakes so that you don’t find yourself either owing money or letting the IRS play with your funds for a year.