Should You Adjust Your W-4 to Withhold More or Less?

Life changes often merit W-4 withholding adjustments. The best example is a second (or third) job. Income from a second job, or a more prosperous side hustle, can significantly increase tax liability, especially in the side hustle example. The same thing is true in reverse. Voluntarily or involuntarily losing another income stream often reduces tax liability.

Because of issues such as ongoing W-4 withholding levels, the Phoenix Tax Consultants team doesn’t just review spreadsheets in late winter and early spring and file forms. Our tax planning professionals are available twelve months a year to help people like you make the best possible financial decisions. There’s no right or wrong answer to a question like “should I adjust my W-4 to withhold more or less during the year.” But there is no right or wrong answer for you.

Lower Withholding Pros and Cons

Sometimes, tax issues, such as withholding, can feel remote. But we are not just talking about numbers on a form. We are talking about real dollars in your pocket. In many cases, lower withholding puts more money in your pocket, at least temporarily.

Quite simply, withholding less for taxes puts more money in each paycheck. More money is typically a good thing, especially if your budget feels tight or if you’re trying to be intentional with investing, saving, or paying off debt throughout the year.

Lower withholding is also a control issue. It allows taxpayers to maintain better control of their money rather than waiting for refunds. This approach requires discipline and diligence to be successful. Our team helps with this part.

However, this approach is also risky. If withholding levels are too low, especially if income changes or tax credits shift, a very unpleasant surprise could be on the way. That situation is very stressful to say the least, particularly if available savings cannot cover the shortfall.

Pros and Cons of More Withholding

Withholding more means a larger portion of a paycheck goes to upfront tax payment. This situation could be very good or very bad. The biggest upside here is safety. If you tend to worry about tax bills or don’t have much savings set aside, higher withholding reduces the risk of owing money, not to mention penalties and interest, when you file your return.

Furthermore, many people like getting large refunds. Technically, a tax refund is like getting change at the store. It is overpaid money coming back. Nevertheless, that refund often functions like forced savings. These taxpayers use money they didn’t miss during the year to reduce debt, build up emergency funds, or pay large expenses.

The downside is that an over-withheld refund is an interest-free loan to the government. That money could have been earning interest, paying down high-interest debt, or helping with monthly expenses. Moreover, over-withholding could adversely affect monthly budgets, especially when unexpected expenses arise.

Finding a Balance

Most people should aim to break even. This goal usually requires periodic W-4 adjustments to ensure wage withholding closely matches anticipated tax liability. The IRS withholding estimator is a big help, especially after life changes like marriage, divorce, having a child, or starting a side gig.

Ultimately, an individual’s choice should reflect their individual financial habits and risk tolerance. Those who value certainty and simplicity should consider over-withholding. But if you’re organized, proactive, and comfortable setting aside money, withholding less offers greater flexibility and control.

Either way, be intentional. Understand why you are choosing one approach over the other, and make sure it supports your broader financial goals rather than working against them. For more ways to maximize your financial resources, contact us online or call 610-933-3507.