How To Get More Money in Your Paycheck
The US tax system is pay as you go, meaning you must pay income taxes on your earnings as you receive them throughout the year. Your employer estimates the taxes on your earnings each pay period (based on how much you earned, your marital status, and how many allowances you claimed on your W-4, "Employee's Withholding Allowance Certificate), withholds the income tax, and submits it to the IRS on a regular basis.
The Consequences of Income Tax Over- or Under-withholding
You should try to match your income tax withholding to your tax liability. If you don't have enough income taxes taken out, you'll owe money to Uncle Sam at the end of the year and you could incur a penalty and interest charges. That's a painful check to write. If you have too much income tax taken out, you'll be giving Uncle Sam an interest-free loan for the rest of the year until you receive your income tax refund.
Why Getting an Income Tax Refund (Over-withholding) Is a Problem
The income tax that is over-withheld from your paycheck each pay period and held all year by Uncle Sam is money you could be using every pay period to pay down your credit card debt, invest in your employer's 401(k) or 403(b) plan, sock away in your savings account(and earn interest on), or pay bills.
How Much More Money Will I Get in My Paycheck?
The amount of extra money you'll see in your paycheck by adjusting your income tax withholding is dependent on a number of factors that are too complicated to go into here. For a general idea, for each allowance you claim (in addition to the allowances you currently claim on your W-4 Form), you'll see between $26 and $90 per month extra in your paycheck, depending on your earnings. If you claim two additional allowances, you'll see an extra $52 to $180 each month in your paycheck. If you claim three additional allowances, you'll see an extra $78 to $270 per month. If you claim four additional allowances, you'll see an extra $104 to $360 per month.
What You Should Do Now
If you got a big income tax refund last year (more than $500), resolve to stop lending the government your hard-earned money by reducing your income tax refund and increasing your take-home pay.
For information on how to change your income tax withholding, see Tweak Your Income Tax Withholding.