I try to utilize as many strategies as possible to hide money from myself and save up large sums for big investment opportunities which will make a significant amount of passive income. As an employee, one tool that has worked wonders for my aggressive savings strategy is the Employee Withholding Allowance Certificate, known as the W-4. I have been successful in putting away thousands of dollars each year into savings, which played a huge role in paying off $30,000 of student loans in three years.
The purpose of the W-4 is to instruct your employer’s payroll department so they know how to calculate your withholdings for federal income taxes each paycheck. Most employees fill out this form when they start a new job and never re-visit it again. The intent is to not surprise you with a large tax bill come tax season when you find out your employer did not withhold enough taxes for the year.
The intent of withholdings is to safeguard yourself from an unwelcomed tax bill come tax season because your employer did not withhold enough taxes for the year. Some employees are aware of how to manipulate this form and will revise it during bonus season to receive a larger payout on bonus checks.
The way the W-4 works by asking employees to self-certify their number of household dependents, the fewer dependents the smaller your paycheck and the more dependents the larger your paycheck. The philosophy spun by most people is that your should fill the form out correctly so that payroll does not withhold more than is needed. You neither want to owe taxes nor receive a tax refund at the end of the year. Everyone makes the argument that by receiving a tax return, you gave the Government an interest-free loan for the year.
I do not buy into this argument because it is a bunch of crap, and I’ll give you two reasons why.
- You would not have made that much money for the year investing the funds yourself little by little every two weeks.
- You are more than likely to spend the money rather than save it.
Interest rates for savings accounts are at an all-time low, ranging from 0.01% to about 0.09% in a high yield account. I have watched my CapitalOne360 (previously ING Direct) savings account interest rate dwindle from 4.25% to 0.75% over the past decade. I also have no expectations of interest rates skyrocketing back up in the near future due to several major economic countries currently offering negative interest rates,which means banks are charging customers to store their money. That is outrageous!
I personally believe tax refunds are good because most people suck at saving money. I love tax returns and maximizing the amount of money that comes back to me through a tax return. I use the W-4 form to hide money from myself in lieu of a larger tax return. Humans are very adaptable, and I have come to realize the smaller my paycheck the more I will adapt my spending habits to accommodate the money I do have available to me.There are two opportunities available through the W-4 form to automatically deduct more money from your paycheck.
There are two opportunities available through the W-4 form to automatically deduct more money from your paycheck. For those of you who are not married and have no dependents, there is only one option.
The first option, for married couples and those with dependents, is the most obvious, list yourself as single rather than married and zero dependents. This will cause payroll to withhold a larger portion of your pay every two weeks as they will assume you will be taxed at a higher rate. Each qualified dependent you claim reduces your taxable income by $3,950.
The second option which is less know can be found is Section 6 of the W-4 form, titled “Additional amount, if any, you want withheld from each paycheck.” When I first started my career I worked for a company that issued paychecks on a weekly basis, I originally set this field to withhold $25 per paycheck, which didn’t seem like a lot of money that would be missed. If I had been paid bi-weekly I would have changed this number to $50. Over the course of 52 weeks that $25 per check added up to $1,300 that I would receive as a lump sum on my tax return. If I had saved that money each week into my savings account I would have made less than $9.75 in interest for the year at today’s 0.75% APY, and I would have run the risk of spending the money. As my paychecks grew every couple of years I also increased the additional withholding amount to $50 per weekly paycheck which now helps me save an additional $2,600 a year.
The average tax refund for 2015 was $3,120 with 81% of tax returns receiving a refund. By utilizing Section 6 of the W-4 you can easily increase your return by 183%, and if you are also willing to list yourself as single with no dependents you can easily triple the amount of money saved through your return.
Keep in mind this is not a tax saving strategy but rather a money saving strategy that utilizes the tax filing process to remove the temptation of spending money by hiding the money from your paycheck. If you have high-interest debt, it may best to pay down that debt faster before implementing this strategy, or if you have problems spending money rather than paying extra into loans like I used to, this can be a great strategy to save large amounts of money to make lump sum payments against your debt each year.