Tax Liability & Your Paycheck
Dr Michael A Wright
As "the Pivot Coach" I help Entrepreneurs, Educators, and Helping Professionals successfully pivot to publish, build brands, innovate businesses, launch online courses, and create new revenue streams.
You may think making money is the key to your ability to pivot. Keeping money is valuable as well. Maybe more valuable than making it in the first place. Tax Liability is what you are saving by using investment vehicles with pre-tax income. Pre-tax because you never get a chance to see it on your paycheck. Paying money out, never seeing it on your paycheck, can be distressing to some who believe they are not making enough money per paycheck as it is. Many don’t know the options that exist to achieve both pre-tax savings and the most money in your paycheck. Get the information you need to reduce your tax liability. You want to reduce your tax liability below zero and keep all the money you make. That’s the game even before retirement. The catch is that you may realize that your expected annual Tax Refund is not a refund, but a review of your tax planning prowess.
Your Paycheck
If you are concerned about the amount of money you get each paycheck, adjust your W-4 and the exemptions you claim. More exemptions mean more money in your paycheck. It also means more potential tax liability when you settle your tax bill for the year. You can calculate your withholding amount at https://apps.irs.gov/app/withholdingcalculator/.
If you are qualifying for more than $1000 each tax season in refunds, you will want to adjust your withholding on the W-4. That refund you receive each year is money that you overpaid to the IRS. Instead of you using that money each pay period, the IRS held on to it. What is worse, they pay you no interest on the amount withheld. Consider that if you put that money into a low-yield checking, you would at least have .07 -.5% to show for it. If you put it into a higher yield, you could have 4-5% to show in 12 months. For an individual receiving $6,000 in tax overpayment refund, this amounts to $190.59 wasted. That’s $15 per bi-weekly pay period. Doesn’t seem like much when you use it on lunch each week. But this is free money that you left on the table rather than collecting interest on it. That’s a bonus in December of $190.59 tax-free. That would be nice near the holidays.
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But it’s more than that. Remember, this is money that you are not paying to the IRS. Depending on your income amount, you may be recouping $250-$500 per month paid to you rather than the IRS. That’s the $6000. The $190.59 is the interest you could make if that $6000 is invested.
Good reasons exist to overpay, or prepay, your tax liability each paycheck. Most of those reasons don’t apply to many. If you are not expecting fees of some kind, you should not overpay the IRS. If you took a disbursement from any financial instrument and expect a penalty or fee. If you have prior tax liability that went unpaid and you expect interest charges or other fees. Both these can be offset by other expenses that reduce your tax liability such as donations or business losses.
The other reason some overpay is because they are not good at saving money. Extra money beyond their bills would be wasted, not invested. Hire an accountant and let them in on everything you are doing. Use them like a financial planner when you have little money. Hire an additional financial coach when you have more money or if you don't know where your money goes each month. If you are not good with money, hire a trustworthy financial advisor as soon as possible whether you have little or more money. Trustworthy advisors show you your money before they ask for it.