When you become an employee of a company they hand you what is called a W4.
The W4 is what determines how much tax is taken out of your check based on if you’re single, married with 2 dependents, 4 dependents, or no dependents…
They want you to fill out your name, address, social security number, and pertinent information to determine your tax bracket.
The highest tax bracket is single 0. If you’re a single person and you have a job with a company that pays you a W2 and you say I’m single and I have no dependents.
They will tax you as though you’re carefree and fancy-free and they will take the most tax out of that. Most people take a single 0 on their W4 so that they can get the most amount of tax taken out. Then the next year they file their taxes and they get a whole bunch of it back and they feel like “oh! Look I just got $4000 in taxes back.”
So, what are you saying when you get your $4000 back of the $10,000 you paid into tax? You are saying you let the government hold onto your money all year long when you could have been living off it.
So, I usually advise that you take a single 1 and then if you feel you’re going to come in short… use a tax calculator and find out if you need to do single 1 plus an additional $50 per pay period, that’s better than doing single 0.
People ask me all the time, why do they get to determine how much tax is taken out?
Well, they don’t really, if you do your homework and figure out your taxes with a tax calculator… you might find out that you don’t owe as much tax as you think.
So, I’m going to encourage you to be more proactive about your W4 before you just put single 0 hands it back in, look at what it says, ask yourself “do I want to give the government more money all year and then get it back in April, or do I want to take my money and use it every month and maybe pay down expenses with it?