Too much or not enough withholding, how to know

Stick figure yelling "Yeah, taxes!"KJ: So with as complex as the tax code is – kind of like being asked to do differential equations while performing brain surgery on top of a tight rope stretching across the grand canyon – one of the things that impacts you on a regular basis that you don’t necessarily stop to think about is your income tax withholding. And so with that brief introduction, I present to you one great (very quick) resource: the IRS withholding calculator. You enter some basic information about your income, payment frequency, dependents (i.e. any little ones running a muk), etc. and in about 5-10 minutes it provides you with a projection for your taxes owed for the year. While it is just that – a projection – it is a useful tool to see if you’re where you should be as well as start to look at how next year may turn out.

Given that it’s about time to close out this year and start planning for next year, it would be helpful to see if any withholding adjustments might needed in January with your employer on your W-4 or if a modification to your quarterly tax payments are needed. Waiting until you file your taxes in the spring to realize “uh oh, I need to make a change!” is not really the best solution.

While this calculator is a good resource, it is not THE calculation with all factors for determining your income tax, so give yourself a little bit of wiggle room just in case. Ideally, you would like to finish your tax return with as close to $0 due or refunded. Huge refunds = giving the government an interest free loan for a year, and huge tax payment = depressing budget fail. If you have a complex tax situation with lots of investments, complex income arrangements, and multiple support obligations, then maybe it’s better to let your CPA do the heavy lifting. In either case, consider a few factors:

Have you switched jobs?
Maybe you found a great opportunity or maybe you were needing a change of pace. Either way, having varied income throughout the year can make it a challenge to keep up! Run the numbers and see if your new job is withholding what they need to be, and see if it’s enough for a full year at the new (higher or lower) level.

Have you been promoted?
First off, congratulations! With the economy improving these last four years, maybe you were in line for a big promotion? Higher income = higher taxes, so plan ahead and make sure you’re not caught off-guard when the tax man cometh to taketh away.

Did you or a spouse stop working?
With one less income (hopefully by choice and not a surprise!), your tax situation may change drastically. Understanding what adjustments can be made is a good start to making sure you stay on track.

Did you acquire a little one?
The stork could have brought your family a little one. While certainly not an offset to the additional food/diaper/toys/you-name-it costs you will incur, you get a little bit of a tax benefit to support a dependent (sounds very grown up, doesn’t it?).

Did you sell a house and are now renting?
With some of the advantages of home ownership (potential deductibility of mortgage interest, taxes, etc.), you might find that even having a similar outlay for rent each month could end up costing you more in federal income taxes each year. Understanding why and how this may impact you is critical!

For us, we sold a home and bought a home, so we’ve got to dig a little deeper into next year’s plan to see if any tax implications may change from what we had experienced these last five years. Plus, with housing prices recovering in most areas around the U.S., look to see this reflected on next year’s real estate tax bill – boo for taxes, but yeah for higher prices, why can’t all the increases just come in the year you sell it!?…

Unfortunately, we didn’t cover any of you that are impacted by a STATE income tax…I’m sure there are calculators out there that can help with those too, so please leave us a comment if you’ve found any tools that help you and your family!

    What do your results show?
    Do you need to make any changes for next year?
    Share with us what you do to try and stay on top of this each year.

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Biweekly or semi-monthly: what’s the difference?

KJ: What’s the difference between biweekly and semi-monthly and how it impacts your budget? Most people think they are the same. Aren’t there about four weeks each month, so shouldn’t they be the same? Why should you care about the difference? There is a simple solution to saving a lot of extra moulah if you get paid biweekly (sorry, semi-monthly payees)…and your budget will be proud!

Let’s break down the biweekly vs semi-monthly paychecks
A biweekly paycheck means you get paid every two weeks. Semi-monthly means you get paid twice per month. With a biweekly payment, you get paid 26 times per year (52 weeks divided by 2), and with semi-monthly, you get paid 24 times per year (12 months times two). That means that the biweekly paycheck has two months of the year with an extra paycheck!

Save, save, save
A good strategy to sock away some extra savings (or add to your vacation fund, home down-payment, gifting, real estate taxes – if you don’t escrow) is to take those two months of the year with the extra biweekly paycheck, and save it! Try building your monthly budget based on just two paychecks, and then you will quickly discover that all of the sudden in two different months of the year (spaced conveniently about six months apart) you will have some ‘extra income’ from those extra biweekly payments. Who doesn’t like some extra income anyways? Even if you save nothing else during the year, this method alone can help you sock away 8% of your net income! That already puts you above the national average savings rate (scary huh?) and gets you that much closer to achieving your goals.

Money Stack

In our household, we have one semi-monthly payment and one biweekly payment. While it varies the timing of our income and expenses (as sometimes the biweekly payments occur early in some months and then later in other months), we focus on our total ‘cash flow’ for the month (income and expenses) excluding those extra biweekly paychecks to make sure we are on track. Hurry up March, here comes the next ‘extra’!

    Do you get paid biweekly or semi-monthly?
    Have you experienced both methods before?
    Which do you prefer – semi-monthly vs biweekly?

Biweekly or semi-monthly: what's the difference? is copyrighted by TheSimpleMoneyBlog.com without consent to republish.

Some of the links in the post above may be affiliate links. This means if you click on the link and purchase the item, we will receive an affiliate commission. We feel strongly about only recommending products or services we use personally and/or believe will add value to you, our readers. Read more about our commitment to providing quality product recommendations.