“I want a large tax refund”…..No you don’t……

Here is a typical conversation between me and one of our employees at our company.

“YOU didn’t take enough money out in taxes out of my paycheck this year, and now I have to pay when I am filing my tax return.”

This statement makes me chuckle a bit, because it is very typical of an uninformed employee. I do like when someone asks this, because then I can give my dissertation on employee tax withholding and tax refunds in general. Another statement I get is, “I want to make sure that I get a large refund when I file my taxes, because I can use this money to pay for…..” This statement actually makes me want to vomit (sorry so graphic).

So, let’s address these two items. First, the employee is responsible for the amount of tax withholding from their paycheck. This is generated by that W-4 form that you fill out when you are hired, and most people don’t ever think about it or change it ever again. The more allowances you claim, the less is withheld. My goal is to “break-even” on my tax return, which I just about successfully did for 2005, having to pay approx. $100 to federal and state. Here is my rationale. If you get a large refund from your tax return at the end of a given year, which means you paid too much in taxes throughout the year. Therefore you essentially loaned the government your money for the entire year, and gained exactly 0% interest on that money. Just think, if you had that money throughout the year you could invest it and make money on the interest and/or appreciation in your investment.

As stated above, you, the employee, are responsible for this. Each individual should consult a tax professional (or review it yourself) to determine how much you should withhold from your paycheck in taxes each pay period. If this amount needs to be changed from your current amount, fill out another W-4 form, which can be attained from your employer or at www. Irs.gov and elect the appropriate amount of allowances, and even withhold an “additional amount” if needed. See what’s changed each year. Did you purchase a new home? Did you have large capital losses? Did you get a raise or earn less than you did the year prior? All of these items will change your taxable income.

The easiest way to check your withholding is by using the IRS Withholding Calculator, which gives you a step-by-step process through the calculation.

The Withholding Calculator can be found here.

A printable W-4 form can be found here.

I hope this helps, and if you have any comments, questions, or concerns, feel free to comment!