Advantages & Disadvantages of Employees Having More Tax Withholding From Their Paychecks

by Laurie Reeves, Demand Media Google
Reducing your tax liability throughout the year makes the annual tax return deadline less stressful.


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The U.S. has one of the lowest tax rates in the developed world, reports the Tax Policy Center. The funds are necessary for government operations and programs. When an employee starts a new job with a company, one of the first thing she does is fill out Form W-4. The form provides a space for additional tax withholdings, viewed by some as a hedge against year-end tax liability.

Additional Tax Withheld

Employees who opt to have more taxes withheld from their regular paychecks provide the dollar amount on Line 6 of the IRS Form W-4 Employee Withholding Certificate. But this isn't a permanent scenario where once you fill it out, you're stuck with it. An employee can elect to change her W-4 as many times as she wants throughout the year, as long as she understands that she is still responsible at the end of the year for paying her taxes. The main disadvantage of having additional taxes withheld at the end of the year is it decreases the income available to you during the year.

The Positive Spin

There's a positive spin to having additional taxes withheld from your paycheck. If you filled out your W-4 form correctly, and added an additional tax withdrawal, in most cases, you will receive a refund after filing your annual income tax return. This may require you to fill out a separate withholding form for the state if you choose to have additional state tax withheld as well.

No Interest Earned

Another disadvantage to having additional monies withheld for taxes from your paycheck is that even though you may get a refund of that money at the end of the tax season, you haven't earned anything extra on the money. The government doesn't pay you interest for using your money during the year on money it refunds at the end of the year. A better idea might be to take that money and put it in a savings account instead and have it accrue interest. That way, you have the extra money for taxes if you need it, plus you've earned money on the balance while it grew.

Reduces Tax Liability

Having extra money removed from your regular paycheck definitely reduces your tax liability at the end of the year. You are less likely to owe additional taxes when you have additional taxes already taken out of your paycheck. If you expect to receive some kind of stipend or balloon payment at the end of the year, having additional taxes withdrawn from your paycheck may help cover the tax liability of such year-end income.

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