Taxes and Withholdings
I was at Burlington’s two weekends ago looking for shoes when I overheard someone telling her friend, “If you need more money, just change your withholdings to 6 or 7. You get more money that way.” Half true.
When you get your first job, nobody really explains what the W-4 form even is or what it means. Basically, when you earn income, you have to pay taxes. However, the government doesn’t know how much income you’ll make that year, so your withholdings are to help estimate how much they should take out of your check each time you get paid.
If you set your withholdings to 0, that means that they will take out a larger amount from your check to hold onto for the year until you file your taxes. When you set your withholdings to 0, you will have more taxes taken from your check than you will owe, which will (typically, not always) result in a tax return. The higher the number you set for your withholdings, the less they will hold onto from your check. The lower the number, the more they hold onto.
So the ideal thing to do is to neither owe the government any money, nor receive a huge refund (your refund amount is like a short-term interest-free loan for the bank). However, if you aren’t as good with your money, or like to use your refund towards buying fun things for yourself, then set your withholdings lower.
Basically, the W-4 gives you a worksheet to help you out, but really, you can write whatever numbers you want.
Which do you prefer? A bigger check now with the potential of owing te government money, or giving a small loan to the government and getting a refund in the spring?