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Optimize Your Paycheck: W-2 Tax Withholding Strategies Thumbnail

Optimize Your Paycheck: W-2 Tax Withholding Strategies

By Angela Dorsey

You work hard for your money. Why allow Uncle Sam to bite off a bigger chunk than necessary? By carefully adjusting your W-4 form, you can optimize your paycheck and keep more of your hard-earned money. 

I wrote this article to guide you through the process of modifying your withholding so you can avoid typical W-4 errors and take home a larger paycheck. 

Tax Withholding Explained

Let’s start with an easy definition of tax withholding and how it factors into a W-2 employee’s paycheck. Basically, tax withholding is the amount of money that your employer takes out of your paycheck and sends to the government to cover your income tax.

You make adjustments to your withholding amounts using the W-4 form. It tells your employer how much federal income tax to deduct from your paycheck. 

It’s important to get your withholding amount correct, because paying too little results in underpayment penalties, and paying too much results in smaller paychecks.

Primary Withholding Factors

These are the key factors that impact the withholding amount on your paycheck:

  • Personal information: When you submit your W-4 form, provide accurate marital status, number of dependents, and any additional income that you earn.
  • Life changes: Changes like marriage, divorce, childbirth, or changes in secondary income all affect your withholding status.
  • Tax laws: Changes in tax laws can significantly affect your withholding amount. Things like tax brackets, rates, deductions, and credits can be modified annually by the government and change the way your employer calculates your taxes.

How to Adjust Your Withholding

It’s easy to verify that your withholding amounts are always accurate. Let’s walk through how to do it:

  • Review your W-4 regularly: My first bit of advice here is to regularly review your W-4 form. If you started a new job or had any other major life events in the last year, it’s essential to submit a new W-4 form that accurately reflects those changes.
  • Utilize the IRS tax withholding estimator: The IRS Tax Withholding Estimator makes it super easy to estimate the federal income tax you want your employer to withhold from your paycheck. The tool lets you see how your refund, take-home pay, or your tax bill is affected by different withholding amounts. Choose an estimated withholding amount that works best for your particular financial situation.
  • Update your W-4 form: If you find that you need to update your withholdings to more accurately reflect your current circumstances, make the necessary changes in the pertinent field(s) of your W-4 form and submit your new form to the Human Resources department at your workplace.

Tips for Optimizing Withholding

Now let’s go over my tips for establishing a withholding amount that aligns with your financial needs:

  • Match withholding to your financial goals: Here’s where you can fine-tune the balance between your immediate and long-term financial needs. Lower your withholding to reduce tax deductions if you would rather have more disposable income every month. Conversely, increase your withholding if you would want a bigger tax refund at the end of the year, which you can use for investments or savings.
  • Claim the right number of allowances: If you have multiple jobs or anticipate a large increase in income, consider claiming fewer allowances. On the flip side, if your income decreased, you might want to claim more allowances. Again, it’s a delicate balancing act; do what’s right for your situation.
  • Consider state taxes: State income taxes vary; some states don’t have any income tax, some states have a high income tax, and some states have a low income tax. The bottom line is that in addition to monitoring your federal tax responsibilities, you also need to adjust your W-4 withholding by considering your state’s tax laws.

How a Financial Advisor Can Help

Fee-only financial advisors can be an enormous help in optimizing their clients’ tax circumstances. By examining their clients’ income, credits, deductions, and financial objectives, they can assist them in establishing the smartest withholding levels. 

Additionally, by taking into account specific variables including income sources, filing status, and life events, advisors can help clients modify their W-4 forms to reduce overwithholding or underwithholding and help keep more of their hard-earned money. 

Ready to Optimize Your Tax Withholding? Let’s Get Started.

At Dorsey Wealth Management, we offer personalized guidance to help our clients make informed financial decisions and create strategies tailored to their unique circumstances. Whether you're nearing retirement or refining your financial plan, we can help you navigate tax withholding adjustments to align with your financial priorities.

Take the next step today. Contact us at (310) 370-7776 or angela@dorseywealth.com to explore how we can support your financial journey.

About Angela

Angela Dorsey is the founder and financial advisor at Dorsey Wealth Management, a fee-only financial planning firm based in Torrance, California, helping women prepare for retirement. Angela earned a BS in computer science from Loyola Marymount University, an MBA from UCLA Anderson School of Management, and spent 20 years as a Senior Compensation Specialist in large corporations before becoming a CERTIFIED FINANCIAL PLANNER® professional and a Registered Investment Advisor (RIA). That background gave her the tools to couple with her passion for empowering women to make the best financial decisions possible. Angela lives in Torrance, California, with her husband. She enjoys spending time at the beach or surrounded by nature. To learn more about Angela, connect with her on LinkedIn.