Let’s face it, we can all use more in our weekly/bi-weekly/semi-monthly paychecks.  Yes, it would be difficult to walk into the boss’ office today and judiciously argue your merits for a raise with the economy in turmoil as it is.  There is, however, a way in which you can increase your net income today (or just as soon as your HR Department can process the changes).

You know that little piece of paper that you filled out when you first started your job?  The worksheet that you probably had no idea what to do with but knew that it had to be filled out?  It’s called a W-4 (you can see a copy here) and its purpose is to tell the employer’s HR Department just how much money in Federal withholding they should take from your gross salary each payday.  Most people choose 0 withholdings so that they can receive a hefty refund when they file their annual 1040 individual tax return, which is a huge mistake.  Some see it as “forced savings”, which to a degree is understandable, except for one small fact: THERE IS NO INTEREST EARNED ON THOSE “SAVINGS”.  It may be nice to see a big direct deposit in your bank account after filing your 1040 to pay off holiday spending, or fund your IRA, or even fund your summer vacation but with more and more people struggling to live on current salaries, why would you want to forfeit the ability to have that extra money in a high-yielding savings account (currently paying anywhere from 2.75% APY-4.00% APY per bankrate.com as of November 5, 2008) or using it to pay for everyday living expenses?

Another often overlooked method of reducing tax withholdings is your employer’s Sec-125 Cafeteria Plan of Flexible Spending Account (FSA).  This vehicle is a way to pay for general health- and child-care expenses such as daycare, medical insurance premiums, and most out-of-pocket medical expenses.  Under such a plan, contributions are exempt from Federal, Social Security, and Medicare taxes (essentially excluded from wages in the calculation of taxes).  This way, you are still paying the same amount of money for medical and child-care expenses, however the earnings are not being taxed, thereby leaving more money in your net pay each period.  Not all employers have established plans, so you will probably need to ask your HR Department about it or request that the issue be researched.

By taking advantage of such not-so-secret methods of reducing your tax withholdings, you effectively increase your net pay, and give yourself a little extra income to hopefully use responsibly.

This entry was posted on Wednesday, November 5th, 2008 at 4:11 pm and is filed under general. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.