What To Withhold

A Twitter listener asks Dave about tax withholdings from their checks. He is married with two kids but doesn't want to pay in at the end of the year.

QUESTION: A Twitter listener asks Dave about tax withholdings from his checks. He is married with two kids but doesn’t want to pay in at the end of the year.

ANSWER: I think that language people use when they discuss withholdings indicates people don’t know how taxes are done. You pay taxes whether you have the correct amount withheld or not. Your tax bill is always the same, provided you do your taxes properly. If you have a tax bill of $10,000, that’s $830 a month. If you make $80,000 a year and will pay $10,000 in taxes, you’ll pay that amount, period.

The only question is whether you’ll pay that amount monthly by having the proper amount withheld each month, or pay too much and get money back later. All that means is you gave the government too much money and they gave it back to you because you were so stupid you overpaid. That’s all it means. It doesn’t mean you did something good or smart when you got money back at the end of the year.

The IRS tables suck and are not accurate. The only way to know for sure what your tax bill is, is to estimate what you’re going to make this year and do a pretend tax return. If you are going to make $82,000 this year, and you factor in your house and kids and all your other stuff, you’ll come up with your tax bill. Then divide that number by 12 to get the amount that you should have withheld from your check each month. If you get paid 26 times a year, then divide it by 26.

Have your human resources department do the correct amount of dependents to create that number being withheld from your check. That’s the exact, perfect way to do it. A less perfect way to do it, but a way that is fairly accurate, is this: If you got a refund last year and the year before, and they were both about the same, and nothing changed like your income or number of dependents, then divide your tax return amount by 12 and have that amount deducted from your check each month.