Claiming a 0 on a tax form means that an individual pays more in taxes with each paycheck but might get a higher tax refund, while claiming 1 takes less money out of a paycheck.
Ultimately, a person ends up paying the same amount of money in taxes each year, regardless of whether he or she claims a 0 or a 1 on a tax return. The difference between the two is that claiming a 0 on a W-4 tax form means that more money is subtracted from each of an employee's paychecks, but he or she might receive a higher tax refund at the end of the year. In contrast, an individual who claims a 1 on his or her W-4 form will pay less out of a paycheck each month and most likely get a minimal refund, if any, at the end of the year. Sometimes, people who claim a 1 on their tax form end up owing the government money at the end of the year.
Considerations in Tax Withholding
The decision whether to claim a 1 or a 0 is ultimately a matter of choice. It depends on whether or not people want to have a greater income immediately or have a smaller monthly income with an end bonus. Employees generally fill out a W-4 form when they start a new job. They can also complete an updated W-4 form when their personal finances change or in light of life events like marriage and divorce. For employees, tax withholding corresponds with payment rate. Most employers withhold a portion of their employees' pay for various purposes. Income from other sources can also be withheld, such as revenue from gambling, pensions, commissions and bonuses. Whatever way income is withheld from an individual, it is recorded as payment to the Internal Revenue Service (IRS) in his or her name. In addition to withholding tax, people might pay estimated taxes.
Estimated and Alternative Tax Payments
Estimated taxes are reserved for people who do not make enough money to have taxes withheld, or for those who do not pay taxes in a traditional manner. People who are self-employed, for example, might pay estimated taxes instead of withholding taxes. Individuals who receive income through rent, dividends, loyalties, capital gains and interest also pay estimated taxes. In addition to paying income tax, people use estimated taxes to pay self-employment taxes and alternative minimum taxes, too.
To make tax payment fair for citizens, the IRS bases tax payment on several factors. Annual income is a deciding factor in how much money taxpayers pay. The information that employees provide to their employers on a W-4 form is another factor. For example, employees can state if they are single or married. People who are married have a lower tax rate than those who are single. The number of allowances individuals claim, and whether or not they want additional taxes withheld, also factor into their tax form completion. Sometimes, employers or the government take more taxes from a person than he or she actually owes. If this is the case, the individual gets a tax return with that amount.
When deciding whether to claim a 0 or 1 on a tax form, the individual ultimately decides whether or not he or she can afford to, and wants to, live with a smaller paycheck each month or live with fewer monthly financial constraints knowing that the consequence might be a lower tax return or owing the government money.