The United States has a "pay as you go" federal income tax. This means you must pay your income taxes to the IRS throughout the year, instead of paying the whole amount due on April 15. If you're an employee, this is accomplished by your employer who withholds your income and Social Security and Medicare taxes from your paychecks and sends the money to the IRS.

The average taxpayer gets a tax refund of about $2,500 every year. This is because they have too much tax withheld from their paychecks. In effect, they are giving the IRS an interest-free loan of their money.

You can avoid giving the IRS interest-free loans by making sure that you don't have too much tax withheld. Ideally, your withholding should match the actual amount of tax you owe for the year.

The amount of income tax your employer withholds from your regular pay depends on two things:

• the amount you earn, and
• the information you give your employer on Form W–4.

When you start a new job, you must fill out IRS Form W–4, Employee's Withholding Allowance Certificate and give it to your employer. Form W-4 includes three types of information that your employer will use to figure your withholding:

• whether to withhold at the single rate or at the lower married rate
• how many withholding allowances you claim (each allowance reduces the amount withheld), and
• whether you want an additional amount withheld.

The number of allowances you claim will increase or decrease how much is withheld. You can claim withholding allowances for yourself, your spouse, and for each dependent. Allowances are also available if you itemize your deductions, or qualify for tax credits such as the child tax credit, education credits, adoption credit, credit for the elderly and disabled, foreign tax credit, retirement savings credit, prior year AMT credit, child and dependent care credit, credit for home mortgage interest, general business credit, and earned income credit.

Your W-4 is not set in stone. You can always give your employer a new W-4 to change your withholding status or number of allowances. Examples of changes that may require changes in your W-4 include:

• getting married or divorced
• having or adopting a child
• no longer being able to claim a dependent that you claimed last year
• buying a new home
• retiring form your job
• increased tax deductible expenses for items such as medical bills, taxes, interest, charitable gifts, job expenses, dependent care expenses, or
• qualifying for a new tax credit, such as the earned income credit or education credit.

You should check your W-4 in early November to give you time to make adjustments by the end of the year. You should also check it again after you file your taxes for the prior year. If too much was withheld for that year, have less withheld for the current year. You'll probably qualify to increase your withholding allowances. Note, however, that you can claim only the number of allowances to which you are entitled. You can't claim lots of allowances you don't qualify for simply because you don't want to have taxes withheld.

If the IRS determines that you do not have adequate withholding, it may direct your employer to withhold more federal income tax by issuing a "lock-in letter." At that point, your employer must disregard any Form W-4 that decreases the amount of your withholding. You will receive a copy of the lock-in letter and have an opportunity to submit to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease your federal income tax withholding. Once a lock-in letter is issued, you will not be allowed to decrease your withholding unless approved by the IRS.

Form W-4 contains worksheets you can use to figure how much you should have withheld. However, it's a lot easier to use a computerized withholding calculator. The IRS website has such a calculator, as does tax preparation software.

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