Technically speaking, you don’t withhold taxes but your employers do. But for the sake of simplicity, let’s just say you withhold taxes.

This is written for those who receive paychecks(W-2) from employers.

I’d like to run a simulation weighing the possible benefits from optimizing payroll withholding.

I generally advise people to withhold enough taxes so you don’t end up paying more taxes along with your tax return. It helps your cash flow management, and more importantly, it’s just better for your mental health.

But if you withhold less tax, you hold more money throughout the year and you get the interest benefits. The IRS wants you to pay enough taxes throughout the year, and it imposes underestimated tax penalties when you withhold too little.

The ideal scenario would be making just enough withholding so you don’t pay underestimated tax penalties and you maximize the interest benefits.

The Assumptions

1. The taxpayer is single(for tax purposes, of course.) and 30 years old.
2. His annual salary is $120K, with even monthly payments of $10K. He gets no fringe benefits. He made $120K last year as well.
3. He claims standard deduction.
4. The annual interest rate is 4%.

Calculating Federal Tax