Are we allowed to prevent the government from withholding taxes? ?

Question

When I get a pay stub every 2 weeks, are we allow to prevent the government or company to withhold taxes and pay them at the end of the year? I mean if we can, isn't it wiser to do this since we can invest this money and invest it in a safe security such as a short-term CD and pay at the end of the year?

Answer 1

You don't have a choice for social security and medicare - that's deducted from all employees.

If you claim a high number of allowances on your W-4, they'll withhold less for income tax.  But notice the line above your signature that says that the info is correct to the best of your knowledge, under penalty of perjury.  Also, from a purely practical point of view,  if you owe more than $1000 when you file, you'll be penalized in addition to having to pay what you owe, and the penalties would most likely more than eat up any interest you'd have gotten.

Answer 2

Others have pointed out the difficulty and the problem with trying this, so I'll just address a theoretical point:

Tax rates are set by the government (state and federal, and other countries do it the same way) assuming that all, or mostly all, of the income tax will come in on time throughout the year.  So the feds will assume that 1/12 of their yearly tax comes in January, 1/12 February, etc.

If everyone did what you suggest, (and there were no penalties involved), the government would have to borrow the money throughout the year to have the cash on hand for it's various payments.  I'm sure you can understand that the members of the armed forces can't wait until April to get paid for the previous year!  

(Assuming the budget was balanced), in order to PAY for that money they would have to borrow, the government would have to raise tax rates to compensate.  

Essentially, if everyone did what you suggest, it would just mean that the government would have to raise taxes to cover interest, and that raise would have to be slightly more than what YOU would make on your taxes owing.  

So really, as much as I hate paying taxes as much as the next guy, the whole system would have to be changed if we held it all back until April.

Answer 3

You are free to request no taxes be withheld from your pay.  That doesn't, however, relieve your obligation to pay taxes on the money you earn.

Answer 4

ask your job to 1099 you at the end of the year as a subcontractor

(its kinda like owning your own business)

Answer 5

No.

We have a "pay as you go" system.

If you owe over $1000 at the end of the year, you get hit with an under-withholding penalty that would wipe out any interest that you would make in a CD or savings account.

Answer 6

The interest you would earn in a safe security such as a short-term CD would be approximately what you would need to pay the penalty for failure to have enough withheld. The interest would be additional taxable income and you would have to eat the penalty.

Answer 7

Yes you can claim an exemption from withholding.  Go to the IRS on-line and you can find the information and forms there.

Answer 8

Others have nailed the estimated tax penalty.

Yes, you are allowed to adjust your W-4.  Yes, you are allowed to owe up to $1000 in tax before you have to pay the penalty.  But, I find that it's better to aim to break even than aim to pay.

1.  You may underestimate your income.  I once sold a bunch of stock in December, this caused me to owe $10,000 in extra tax.  I quickly made an estimated tax payment, but to avoid the penalty I had to go through all my records and do a form 2210 showing that I didn't have the taxable event until December, therefore I didn't owe the tax payment until January.  That form is a ROYAL pain to do.

2.  You have to remember to file by 4/15 or get an extension. If you get a small refund, there is no failure to file penalty.  Owe money and file late, it's a 5% per month penalty (max 25%).

3.  Owe and can't pay, then the IRS will notice and send your employer a "lock in" letter.  That will prevent you from ever changing your W-4 again unless you have permission from the IRS.  

Answer 9

You can claim "exempt," but when you do your taxes in the spring, you will not only owe the lump sum, but you will also owe penalties.  The interest you could have earned on this money will pale in comparision to the penalties you owe.

Answer 10

The only way you can prevent having withholding taken out is if you are exempt and claim exempt on your W-4, or have so many exemptions (rarely the case) as to have your withholding calculate to $0.  I believe you can only file exempt if you had zero tax liability in the prior tax year and you have reason to believe you won't have any this year either.  However, filing exempt when that is not the case can get you in serious trouble, so make sure you act accordingly.

Re:  Your Additional Information

It's understandable you want to get into good habits early.  But yes, that's pretty much the way it is.  You don't want to get in trouble for saying you're exempt when you're not.  It's much better to go ahead and have enough withheld, so that you at LEAST break even at the end of the year.  

Even making low income, you'll be surprised at how much withholding adds up over a year.  That's money YOU don't have to come up with at the end of the year.  I file Single and 0 on my W-4, have the most taken from my check (which really ISN'T all that much of a difference on each paycheck), and still get a nice little refund when I file... although it's getting less the more I make.