Question

One of your employees comes to you and states the following, " I'm considering amending my W-4 so that an additional $10 is withheld each week. That way I will get a bigger refund next year." How would you reply to your employee. Consider whether they legally can do this and any advantages or disadvantages of pursuing this course of action. Finally, if you were they, what would you do?

Answer 1

An employee's circumstances might require additional adjustments on his W-4 and It is perfectly legal to amend your W-4 ( form for adjusting your withholding tax ).

When you have too much money withheld from your paychecks, you end up giving tax authoities an interest-free loan (and getting a tax refund).

But there's a better way to manage the hard-earned money.

Why not take home that money and invest the proceeds and earn interest on it?

On the other hand, having too little withheld from your paycheck could mean an unexpected tax bill or even a penalty for underpayment. Hence the amount to be withheld has to be managed but getting additional $10/week is not one of the wise options.

This amounts to $40 / month and $480 / year and this amount can be invested in Mutual funds / SIPs or even Insurance can be bought.

Advantages could be : could save you from paying penalty if the amount already withheld is less as compared to total tax liability.

Disadvantages : Getting more amount deducted now to get refund later is not wise money management. We should watch out for our hard earned money and explore more investing options that market offers.

If they were me, I would compute my whole tax liability and take account of taxes already withheld in previous months and the future tax liability. Would leave appropriate portion for witholding in future months and the rest i would invest to earn more bucks as interest / dividend.