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.