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Are you Playing the 'Withholding Game'?

Updated: Jul 13

“Do you have McDonalds’s money?” A year ago, that was an easy answer. Most people not only had a comfortable amount of disposable income, they had “guac is extra” money. Fast forward to today and a lot of us are beginning to feel the pinch of inflation.



With this pinch comes a lot of tough decisions. The simple question is, how do you find a little extra money? Do you choose to cancel some subscriptions, stay home instead of going out or do you opt to pick up a second job or side hustle? I have noticed that most people’s first steps to “finding extra money” is to play what we lovingly call, “The Withholding Game”. This means playing around with your W-4 at work to adjust your taxes withheld and thereby adjusting your take-home pay. Before I weigh in on this risky game, let’s break down exactly how your W-4 impacts you.


Let’s start with what the W-4 actually does. Back in the day, everyone in the country would basically receive a bill for their share of the country’s budget. This amount would be due in full around April and as you would imagine, this was not only rough for most, it was almost impossible for working class families. Enter the W-4. This document allowed employers to proactively withhold income from a paycheck based on filing status, dependents, anticipated tax credits, and deductions. Of course, we know that this not only benefitted the country because they were actually going to see the taxes owed, but taxpayers were also feeling the relief of no longer being surprised with a bill. So overall, when done correctly, the W-4 ensures that you will not end up owing taxes when you file your return.



So back to the Withholding Game. People who have seemingly figured out this trick will adjust their withholding so that their employers report them owing less taxes and then boom, bigger paychecks. Seems pretty straightforward right? Unfortunately, no. What is actually happening here is that you are reporting wrong information, so you are paying the wrong amount of taxes. It’s like telling a parking attendant that you are handicap, so you can park in a close spot but not actually having the handicap decal. The attendant might let you through, but without the decal you’re sure to get a ticket since you probably aren’t actually eligible to park there.


Overall, the W-4 should match your actual filing status on your return. So if you are married with 2 kids, but file as single no dependents, you cannot take advantage of the lower taxes on your paychecks. I mean, you can, but you will most likely owe the difference come tax time. This is the important thing to note, the W-4 is your way of paying towards your overall balance due to the IRS. If you pay less throughout the year, you will have a balance for the remaining amount. If you pay more, you will have overpaid and should receive the difference back as a refund.



The W-4 can be a little tricky for some. A lot of filers have unique arrangements and selecting an arbitrary filing status might not be as easy for everyone. If you are unsure, we always like to remind our clients that St Clair Financial Services is open year-round and happy to assist with questions like this. So if you need to talk through the best scenarios for your situation, give us a call. We’re happy to help and unlike the guac, this service is not extra!

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