Adusting Your Paycheck Tax Withholding To Keep More Money In Your Bank Account

There are a few things that are certain in life, however, there are at least 2 things we can all count on:

    Continues after Advertisement

  • Death
  • Taxes

A few people I know actually look forward to doing their taxes every year because they know they’ll be getting a giant refund.  For example, one friend  just received a $3000 refund, and he’s been banking on getting that refund for some time to make some repairs around the house.

Is it wise to depend upon a large refund every year like he does, or should he be adjusting his withholding on his paycheck, and getting more money in his account up front?


My feelings on the issue are this; Why give an interest free loan to the government every year when you could be keeping that money for yourself, and even earning some interest on it?

How Do You know You Need To Adjust Your Withholding?

How do you know if you’re withholding too much on your taxes every year?

  • If you’re consistently getting large refunds, like my friend who got an expected $3000 check, you’re probably withholding too much.
  • If your situation has changed, like you’ve gotten a divorce, you may need to adjust your withholding.

What other situations will necessitate a change in your withholding, either up or down?

  • If you recently got married.
  • You got divorced.
  • You had a baby.
  • You bought a house.
  • You have new separate non-wage income and you want your withholding increased to account for it.

How To Adjust Your Withholding

To adjust your withholding is a pretty simple process.  You need to submit a new W-4 to your employer, giving the new amounts to be withheld.  If too much tax is being taken from your paycheck, increase the number of allowances on your W-4.  If too little is being taken, decrease the allowed amount.

You can usually get a new copy of the W-4 form from your HR or payroll department, or simply grab it from the IRS website (W-4 Form) and fill it out on your own.

Not sure how much you should be withholding?  You can go to the IRS website and they have a withholding calculator where you can figure out what you should be withholding.

So the easy 1-2-3 step process is:

  1. Figure out your new withholding on through the IRS’s withholding calculator.
  2. Get a new W-4 Form and fill it out.
  3. Submit your new W-4 to your payroll department.

If you were having too much withheld, you just gave yourself an instant pay raise!  Be careful, however, if you withhold too much you may find yourself with a nasty little tax bill at the end of the year, and scrambling to file for an extension!

Dave Ramsey On Adjusting Your Withholding

Here’s a discussion that Dave Ramsey had with a caller on his show recently about adjusting tax withholdings.

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

Are you withholding too much onyour paycheck?  Are you considering filling out a new W-4 to give yourself a pay raise?  Do you prefer getting a large refund at the end of the year?

Last Edited: 7th July 2014

Related Posts


    Share Your Thoughts:

  1. says

    I changed my withholding to 2 last year, and my wife claimed 0. Well this year we got back a whopping $3 refund. I’m happy we didn’t give the government a loan like you described, and I was pleased because we put that money towards paying off debt. But its hard to be happy around this time of year when you hear everyone else getting thousand dollar refunds.

  2. Phi says

    Our return this year was about $6k; more than ever before. It was due to a combination of things so we thought it was time to take the dollars up front as of February. I changed my witholding from 1 to 6 (my wife doesn’t work) and love getting the extra $175/month more. Plus, we’ve left ourselves enough cushion so that we’ll probably get a reasonable return next year. Don’t mind lending a little to the gov’t but would be horrified to end of paying anything around April 15th. And this way we get a small treat around tax time!

  3. Angie says

    I know that on PF blogs it is tantamount to sacrilage to admit that I enjoy getting a large refund, but the fact is, I do! DH and I find it challenging to save small amounts of money. I know what we should do, and we are diligent in most areas of our financial lives (no debt but mortgage, almost maxed on the 401k…), but if we changed our withholdings we would likely spend the extra money on more expensive date nights, more junk for the kids or fritter it away on something else. Getting back a big return is what has helped us truly pad our savings account. I know in my head that this is an interest free loan to the government, but if you figure that I would be earning 3% interest on $200 per month, I am willing to pay a $39 stupid tax to ensure that I am not foolish with the $2400 we’d get back. That’s my two cents anyways.

    PS – first time I’ve stumbled on your blog – can’t wait to read more!

  4. says

    Thank you so much for posting this! My husband and I will owe on our taxes this year because it looks like they didn’t withhold enough from his taxes each pay period, so we’re bummed. But, when you described it as an “interest free loan” to the government, I do feel a little better now. Good to know that we can make these small changes to our tax forms during the year to effect the final outcome each April– that’s the power of small for you!

    Kates last blog post..Stains the World Famous Cupcake Dog

  5. Jade says

    I claim single and none, with an extra $20 taken out of each check. (I get paid twice a month.) My employer insists that I am not entitled to the complete federal stimulus refund b/c I have the extra money taken out. Based on my salary, I should get $400 for the entire year, but so far each check has only been an increase of $1.86. It’s almost as though the extra money is being taken out of my base slaary and then again out of the stimulus. I know of others who work elsewhere and claim the same as I with the extra taken out, and they received around $10 stimulus for a weekly check. How can I get the payroll dept to undertsand my position? Any advice?

  6. says

    I heard the analogy of getting a big tax refund being similar to letting your neighbor borrow a gardening tool. You give it to him and he returns it to you next year, except that now the tool is rusty, makes some funny noises, and doesn’t quite do as excellent of a job as it once did. Same with letting the gov’t borrow money for a year – with an increasing cost of living (inflation) averaging about 3% over the long haul, what one dollar buys one year may not buy the same amount the next year.

    If this is the only possibly way that some people can, then I’m ok with it. But as a financial advisor, I really try to get clients to save the weekly/monthly dollar amount difference that can be adjusted from their withholding into a savings account somewhere.

  7. says

    Hey Peter,

    Great post and thanks for the link to the IRS Withholding Calculator. I see this problem over and over and over again. Folks will be struggling to make ends meet and start dumping debt, then they get a $6,000 tax refund. That’s $500 a month they were missing out on throughout the year!

    I think taxes bother us so much that we just want to get them over with, and we don’t necessarily look at the situation to determine if we could do something different for our own benefit.

  8. says

    Ralph, I’m not sure why you’re taking issue with the article? You’d be surprised at how many people actually need advice on how to adjust their withholding, it may seem common sense to some folks like you, but others who don’t deal with taxes all the time sometimes need a couple of pointers on how to follow through with something like this.

    I’m also not sure why you take issue with the audio from Dave Ramsey talking about adjusting withholding. I thought it was pertinent to the issue at hand, and I agree with the advice he gives?

    thanks for stopping by..

  9. Karie Johnson says

    My husband sometimes has his boss take no taxes out of his check without filing a w-4. They only take out for FICA.
    I always though that you needed to fill out a new w-4 with more dependents to get more money from your pay check. Can you tell me if what his boss is doing the right way to do this. We are taking a vacation soon and wanted to have some extra spending money. We do not see eye to eye on this. Can you give me an answer.

    Karie Johnson

Previous Post:
Next Post: