Tax withholdings: do I trust myself or the IRS?

imagine girl · 12-23-2007, 05:41 PM

All my financially savvy friends make fun of me for letting the IRS keep my money from every pay check. They say it is much better to overclaim your number of dependents. Letting IRS keep the money is like giving George Bush an interest-free loan.

I see the logic in that. But I am also chicken about getting that extra $50-100 every month. What if I spend it all and end up owing taxes? How does everyone deal with this problem?

Will · 12-23-2007, 05:46 PM

Do you do direct deposit? If you do, why not create an additional "tax savings account" and have your bank automatically transfer a small amount of money from your main checking account into the tax savings account? This way you never have to think about it.

CFOontheGo · 12-23-2007, 08:05 PM

I would suggest that you go to a tax professional, an Enrolled Agent or CPA, and ask them to figure what your correct amount of withholding should be. Then you can arrange it so you will be getting a small refund. If your finances are not too complicated this is not difficult.

In addition, I would follow Will's advice and use an auto debit to put money in a savings account that you only allow yourself to access in April. Then if you owe, you will have the money to pay your taxes, and if you don't you get a refund! With interest.

katlady · 12-23-2007, 10:14 PM

Quote:

I would suggest that you go to a tax professional, an Enrolled Agent or CPA

That's great advice. If you have a regular accountant who does your taxes, I think he can easily answer this question for you, probably for free!

Djmem · 12-24-2007, 04:32 AM

I feel the same way as your friend. The problem is, I have not gotten around to actually taking my proper deductions. What I am currently doing to build my emergency fund is to have money deducted each pay period and put into a high interest online bank. That way I do not have a chance to spend it, and I do not miss it. It does bother me that Uncle Sam withholds your money for the entire year when you could be earning interest. It also bothers me that my bank holds my property taxes and makes interest on the money. I think the best thing that people can do is learn to control their spending and become savers. Make it a new year’s resolution!

soupkitchen96 · 12-24-2007, 10:47 AM

Quote:

I feel the same way as your friend

You mean you feel like making fun of Imagine Girl too?

Philip Brewer · 12-24-2007, 11:59 AM

I knew a guy who couldn't stand to see the IRS get all that interest. (This was back in the days when interest rates were 11% or more.) So, he adjusted his exemptions up so as to keep almost all his money.

Of course, there's a problem with that. It's not good enough to just pay your taxes in April. If you owe "too much," the IRS wants penalties and interest. So, this guy adjusted his exemptions back down late in the year, so that almost all the money from his last few paychecks went to the IRS. (He had to fix the payroll software to correctly handle negative exemptions to make that work. Fortunately, he was the software guy for that company. In those days lots of companies did their own payroll software.)

(See, the IRS complains if you do that with your quarterly estimated payments, but for withholdings from regular paychecks, it doesn't care. As long as you end up owing no taxes, it doesn't matter when in the year the money was withheld.)

It all worked great for him, except that the company's accountant noticed that he was having huge amounts withheld and assumed that he was trying to get a big refund. So, the accountant tried to gently explain to my friend that he was giving the IRS a free loan. Not wanting to explain that he'd actually gotten a free loan from the IRS and then fiddled around with the payroll software to clean things up so no one noticed, my friend had to sit there and get this lecture on how if he just saved the money himself, he could keep the interest himself.

That was back in the late 1970s. The rules have tightened up since then. I don't know if the same deal would still work.

Personally, I aim to hit as close to zero as possible. Life is too short to spend the time to do all the calculations to try to bring things in owing the maximum amount you can without penalties (which is the winning option from a purely financial point of view--maximum interest-free loan from the IRS). But I certainly don't aim to get a refund back.

davoscat · 12-24-2007, 08:12 PM

Quote:

my friend had to sit there and get this lecture on how if he just saved the money himself, he could keep the interest himself.

I hate it when that happens. But if that's the worst thing to happen to your friend he got off sort of easy. This story sounds so detailed. Is it autobiographical?

It also reminds me of the Office Space scam where they wrote a "take a penny" software which ended up stealing tens of thousands of dollars.

TeresaMichelsen · 12-24-2007, 11:21 PM

If only I could get it withheld, I'd jump at the chance. You have no idea how complicated it is to have a self-employed income that varies from year to year, and from month to month within the year, and have to guess how much you should be paying in estimated taxes each quarter. You get dinged if you pay too little in any given quarter (never mind the whole year) AND you get dinged if you don't pay exactly the same amount each quarter (never mind that the "quarters" aren't all the same number of months).

So somehow you have to estimate at the beginning of the year what you will make, and my income is incredibly variable. The whole problem would be solved if the IRS would just take a percentage out of each payment you get from a client (or at least you could choose that). At least then you would be closer to the actual value at the end of the year. As it is, I've been off by $5-10K in either direction. And that doesn't count social security - the most infuriating of taxes, since I am sure I'll never see any of it, and now I have to pay not only the employee part but the employer half as well. Sigh.

Sorry, just a little rant on how obnoxious this all is to the self-employed person. I mean, just how hard could it be to have quarters consist of 3 months each? It seems like each little step in the process has unnecessary complications (and I'm a Ph.D. scientist, so I can handle forms and math, generally speaking).

Philip Brewer · 12-25-2007, 06:08 PM

Quote:

Originally Posted by davoscat

This story sounds so detailed. Is it autobiographical?

Nope. This guy was kind of my mentor when I was in college. We spent a lot of time chatting, and he told me a number of stories like this. Clearly they made an impression on me.

Anyway, everything he did was legal, when he did it. (Might not be now.)

12-23-2007, 05:41 PM	#1
imagine girl Member Join Date: Dec 2007 Posts: 46 Reputation: (10)	Tax withholdings: do I trust myself or the IRS? All my financially savvy friends make fun of me for letting the IRS keep my money from every pay check. They say it is much better to overclaim your number of dependents. Letting IRS keep the money is like giving George Bush an interest-free loan. I see the logic in that. But I am also chicken about getting that extra $50-100 every month. What if I spend it all and end up owing taxes? How does everyone deal with this problem?

12-24-2007, 04:32 AM	#5
Djmem Junior Member Join Date: Dec 2007 Posts: 2 Reputation: (10)	Interest free loan I feel the same way as your friend. The problem is, I have not gotten around to actually taking my proper deductions. What I am currently doing to build my emergency fund is to have money deducted each pay period and put into a high interest online bank. That way I do not have a chance to spend it, and I do not miss it. It does bother me that Uncle Sam withholds your money for the entire year when you could be earning interest. It also bothers me that my bank holds my property taxes and makes interest on the money. I think the best thing that people can do is learn to control their spending and become savers. Make it a new year’s resolution!

12-24-2007, 11:21 PM	#9
TeresaMichelsen Junior Member Join Date: Dec 2007 Posts: 2 Reputation: (10)	Wish I could get it withheld If only I could get it withheld, I'd jump at the chance. You have no idea how complicated it is to have a self-employed income that varies from year to year, and from month to month within the year, and have to guess how much you should be paying in estimated taxes each quarter. You get dinged if you pay too little in any given quarter (never mind the whole year) AND you get dinged if you don't pay exactly the same amount each quarter (never mind that the "quarters" aren't all the same number of months). So somehow you have to estimate at the beginning of the year what you will make, and my income is incredibly variable. The whole problem would be solved if the IRS would just take a percentage out of each payment you get from a client (or at least you could choose that). At least then you would be closer to the actual value at the end of the year. As it is, I've been off by $5-10K in either direction. And that doesn't count social security - the most infuriating of taxes, since I am sure I'll never see any of it, and now I have to pay not only the employee part but the employer half as well. Sigh. Sorry, just a little rant on how obnoxious this all is to the self-employed person. I mean, just how hard could it be to have quarters consist of 3 months each? It seems like each little step in the process has unnecessary complications (and I'm a Ph.D. scientist, so I can handle forms and math, generally speaking).

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12-23-2007, 05:46 PM	#2
Will Administrator Join Date: Jan 2007 Posts: 378 Reputation: (19)	Do you do direct deposit? If you do, why not create an additional "tax savings account" and have your bank automatically transfer a small amount of money from your main checking account into the tax savings account? This way you never have to think about it.

12-23-2007, 08:05 PM	#3
CFOontheGo Junior Member Join Date: Dec 2007 Location: CA Posts: 23 Reputation: (10)	I would suggest that you go to a tax professional, an Enrolled Agent or CPA, and ask them to figure what your correct amount of withholding should be. Then you can arrange it so you will be getting a small refund. If your finances are not too complicated this is not difficult. In addition, I would follow Will's advice and use an auto debit to put money in a savings account that you only allow yourself to access in April. Then if you owe, you will have the money to pay your taxes, and if you don't you get a refund! With interest.

12-24-2007, 11:59 AM	#7
Philip Brewer Wise Bread Blogger Join Date: Jul 2007 Location: Champaign, IL Posts: 21 Reputation: (10)	I knew a guy who couldn't stand to see the IRS get all that interest. (This was back in the days when interest rates were 11% or more.) So, he adjusted his exemptions up so as to keep almost all his money. Of course, there's a problem with that. It's not good enough to just pay your taxes in April. If you owe "too much," the IRS wants penalties and interest. So, this guy adjusted his exemptions back down late in the year, so that almost all the money from his last few paychecks went to the IRS. (He had to fix the payroll software to correctly handle negative exemptions to make that work. Fortunately, he was the software guy for that company. In those days lots of companies did their own payroll software.) (See, the IRS complains if you do that with your quarterly estimated payments, but for withholdings from regular paychecks, it doesn't care. As long as you end up owing no taxes, it doesn't matter when in the year the money was withheld.) It all worked great for him, except that the company's accountant noticed that he was having huge amounts withheld and assumed that he was trying to get a big refund. So, the accountant tried to gently explain to my friend that he was giving the IRS a free loan. Not wanting to explain that he'd actually gotten a free loan from the IRS and then fiddled around with the payroll software to clean things up so no one noticed, my friend had to sit there and get this lecture on how if he just saved the money himself, he could keep the interest himself. That was back in the late 1970s. The rules have tightened up since then. I don't know if the same deal would still work. Personally, I aim to hit as close to zero as possible. Life is too short to spend the time to do all the calculations to try to bring things in owing the maximum amount you can without penalties (which is the winning option from a purely financial point of view--maximum interest-free loan from the IRS). But I certainly don't aim to get a refund back.