My father says that if I need more money, I can withhold less on my W-4 (which won't result in the same oh here's $3,000 come tax return time), but will give us access to more money.

So how do I know how much I can withhold without withholding too much? or too little?

  • When I implemented a payroll system for my company back in the 70's, I was amazed how many employees were claiming large numbers of dependents on their W4 just to max their paychecks.
    – joe snyder
    Dec 8, 2020 at 16:24
  • 7
    Important to remember that the refund you get when you file taxes is essentially an interest-free loan to the IRS. Unless it's made up of refundable credits (that's a subject for a different question), it isn't free money, it's YOUR money the IRS is giving back. Consider whether it would be better for you have it now, or for the IRS to hold it until you file your return.
    – Seth R
    Dec 8, 2020 at 17:12
  • I'd have to ask what's worse, getting a $3k refund or having to pay $3k, or even $1k? Yes, you can keep more money by changing your deduction, but you need to be careful to not screw yourself when it comes to tax time. Dec 9, 2020 at 22:55
  • It depends greatly whether you're salaried, contract, self-employed, gigworker etc., and whether your income is fixed and predictable. Which are you? How accurately do you know your 2021 income?
    – smci
    Dec 10, 2020 at 5:31

3 Answers 3


My father says that if I need more money, I can withold less on my W2 (which won't result in the same oh here's $3,000 come tax return time), but will give us access to more money.

He's right.

So how do I know how much I can withold without witholding too much?

Use the IRS Withholding Calculator, and then file a new W-4 (and probably you're state's version of the W-4) with your employer.

From the website:

The IRS encourages everyone to use the Tax Withholding Estimator to perform a “paycheck checkup.” This will help you make sure you have the right amount of tax withheld from your paycheck.

There are several reasons to check your withholding:

  • Checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year.
  • At the same time, you may prefer to have less tax withheld up front, so you receive more in your paychecks and get a smaller refund at tax time.
  • 22
    Tax seems so complicated in the US.
    – GamerGypps
    Dec 8, 2020 at 11:52
  • 5
    @GamerGypps that's what you get when politicians discover that they can buy votes "in the name of fairness".
    – RonJohn
    Dec 8, 2020 at 14:04
  • 3
    @GamerGypps the rules are complicated, but we also have a highly manual non-automated and non-fully-integrated way of administering the rules (at least for personal taxes, not sure about business tax) Dec 8, 2020 at 14:26
  • 2
    @RonJohn Not for dependents (there's child benefit which is mechanically very similar to a deduction) but yes for being blind. You apply for the relevant deduction and the amount withheld from your paycheck is changed accordingly. Why would that be difficult? Dec 8, 2020 at 21:05
  • 1
    @RonJohn you tell the website gov.uk/tell-hmrc-change-of-details/… ; there is also a "tax code" which is a compressed version of this contractorcalculator.co.uk/uk_tax_codes_guide.aspx
    – pjc50
    Dec 9, 2020 at 11:04

The goal of withholding is to get as close to the actual amount of tax you will owe by the end of the year as possible. So ideally, you should have no refund and owe no tax when you file your tax return. If you find yourself consistently getting a large refund, that means you are consistently over-withholding.

From a rational point of view, it is disadvantageous for you to over-withhold because you are giving the government an interest-free loan until tax time. It is advantageous for you to under-withhold as much as possible, as that way the government is giving you an interest-free loan until tax time. However, if you under-withhold too much (specifically, if the withholding is below 90% of this year's tax liability and below 100% (110% for high earners) of last year's tax liability), you will trigger a penalty. So the optimal way to withhold would be to under-withhold a little bit, but not enough to have a penalty.

You would have to do some calculations to figure out how to adjust your W-4 so that you will reduce your current over-withholding to about exactly the right withholding, or maybe even a little under-withholding.

Another thing your father might be referring to is that, if you have a short-term need for money in the middle of a year, you can reduce withholding earlier in the year and increase withholding later in the year to make up for it. But you have to be careful to remember to change your W-4 again in the latter part of the year, and leave enough time for increased withholding to make up for the difference (W-4 changes might not take effect immediately).

  • 2
    "as that way the government is giving you an interest-free loan until tax time" No. You aren't getting an interest-free loan in that case. It can't be an interest free loan in both directions. The money at any given point legally belongs to one person and effectively is loaned to the other. The taxes aren't due until tax day, so you aren't receiving a loan. You are possessing your own money free and clear.
    – eques
    Dec 8, 2020 at 20:22
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    @eques The amount of taxable income that is not withheld but still owed to the government by the filing deadline is effectively money that can be invested for potential returns prior to payment--so long as the amount doesn't trigger a penalty. For example, if you can under-withhold $100 per month without penalty, you could theoretically put that into a short-term investment with guaranteed return, pay the $1200 when filing, and keep the difference. Otherwise, paying the exact withholding would net you zero. That is the sense in which I interpret "interest-free loan."
    – heropup
    Dec 9, 2020 at 2:56
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    "The goal of withholding is to get as close to the actual amount of tax you will owe by the end of the year as possible" - That's one possible goal, for the reasons mentioned, and perfectly fine. It's not everyone's goal or the only goal. Some people prefer to get a big refund at tax time, interest free loan to the government notwithstanding. Or to just not have to bother with extra forms and rules/penalties for under-witholding. And that's all perfectly fine too.
    – aroth
    Dec 9, 2020 at 3:29
  • 1
    @user102008 but money owed in the future is not money owned by the other party now. Just as I can choose to pay extra on my mortgage (to reduce future interest) but doesn't follow that because I can, that the bank is loaning me extra money if I choose not to pay early. Thus, under-withholding is not a loan from the government. I'm not disputing how it plays out financially or that you have to settle up by April 15th only that holding on to my own money is not a loan from the government.
    – eques
    Dec 9, 2020 at 18:17
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    @BenVoigt: "Answer and comments claim that shortfall is due at tax filing time. This is wrong." Assuming your total withholding for the year reaches 90% of the year's tax liability or 100% (110% for high earners) of the previous year's tax liability, there is no underpayment penalty and if there is a shortfall it is due by April 15 of the next year. This is not wrong.
    – user102008
    Dec 10, 2020 at 0:28

The instructions for Form W4 indicate that for the most accurate withholding in a multi-income household you should leverage their Tax Withholding Estimator.

It's best to follow IRS instructions rather than guess on your own, but I'd still monitor the impact of the update you make to confirm withholdings are in line with expectation (difference should sum over the year to roughly your average refund).

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