Z is for Zero.
If you work a regular job – meaning that you’re not an independent contractor – you pay federal income tax as you go by having it withheld from your pay during the year. This is called “withholding” and is based on the number of allowances you claim when you file a federal form W-4, Employee’s Withholding Allowance Certificate (downloads as a pdf), with your employer.
The general rule is that the more exemptions that you claim, the less in federal taxes is withheld. If you claim zero exemptions, the maximum amount of withholding will be taken from your check. You can also opt to have zero withholding.
The key is to balance the amount of withholding so that you don’t owe too much – or are owed too much – come tax time. The best way to do this is to make sure that your form W-4 is correct. Fill out the corresponding worksheets (attached to the form), if necessary. Figure out what makes the most sense for your individual situation. You can also use the IRS withholding calculator to help you figure the correct amount.
As tempting as it might be to claim no withholding, you don’t want to be in a situation where you owe so much tax at year end that you’re subject to penalty. Conversely, if you withhold too much, sure you’ll get a nice refund, but it’s basically an interest-free return of your own money – not so terrific.
Be smart. Make the right decisions. Figure your withholding appropriately. You’ll know that you’ve gotten it right when you owe (or are owed) an amount as close to zero as possible. In that case, being a total zero is perfect.
And that’s a wrap! Thanks for following along. You can catch up on the whole series here:
Taxes from A to Z: A is for Alimony
Taxes from A to Z: B is for Barter
Taxes from A to Z: C is for Capital Losses
Taxes from A to Z: D is for Deductible Taxes
Taxes from A to Z: E is for Educator’s Expenses
Taxes from A to Z: F is for FSA
Taxes from A to Z: G is for Gift Expenses
Taxes from A to Z: H is for Home Improvements
Taxes from A to Z: I is for Injured Spouse
Taxes from A to Z: J is for Job Search Expenses
Taxes from A to Z: K is for Kiddie Tax
Taxes from A to Z: L is for Levy
Taxes from A to Z: M is for Making Work Pay Credit
Taxes from A to Z: N is for Noncitizen Spouses
Taxes from A to Z: O is for Offer in Compromise
Taxes from A to Z: P is for Penalty on Estimated Tax
Taxes from A to Z: Q is for Qualified Dividends
Taxes from A to Z: R is for Refund
Taxes from A to Z: S is for Standard Deduction
Taxes from A to Z: T is for Tuition and Fees Deduction
Taxes from A to Z: U is for Unreasonable Compensation
Taxes from A to Z: V is for Vacation Home
Taxes from A to Z: W is for Wash Sale
Taxes from A to Z: X is for X-Mark (Signature)
Taxes from A to Z: Y is for Year End
And don’t despair too much… If you’re going through withdrawals already, you can catch last year’s (2010) series starting with A is for Alimony.
- Making Sense of the Making Work Pay Credit (2011)
- Taxes from A to Z: T Is For Tuition and Fees Deduction
- Taxes from A to Z: X is for 1040-X
- Taxes from A to Z: S Is For Standard Deduction
- Taxes from A to Z: P Is For Penalty on Estimated Tax