Can I zero out my W2 withholding without getting hit with penalties?
Hey everyone! I work for my parents' business and handle most of the back-office stuff like accounting, bookkeeping, and payroll, but I'm not super familiar with all the payroll tax laws. I'm wondering about my own payroll taxes. Right now I'm set up with all the normal withholdings - federal, state, unemployment, local city tax, etc. But I'm curious if I could legally set my federal and state withholding to $0 on each paycheck and just pay everything as one lump sum when taxes are due. My thinking is that I could take roughly 20% of each paycheck and dump it into a high-yield savings account, letting that money grow for me until I need to pay my taxes. I know the interest won't be life-changing, but I'd rather have that money working for me than sitting with the government interest-free all year. To be clear - I'm extremely disciplined with money and understand this approach wouldn't work for most people who might spend the cash, but I always prioritize paying the IRS. I'm just trying to optimize. So, can I legally do this without getting penalized? And if there are penalties, what would they be? Thanks for any insights!
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Mateo Silva
While you technically can set your withholding to $0, you'll likely face an underpayment penalty unless you meet one of the safe harbor rules. The IRS requires you to pay taxes throughout the year, not just at the end. To avoid penalties, you generally need to either: 1) Owe less than $1,000 after subtracting withholdings and credits, 2) Pay at least 90% of tax for the current year, or 3) Pay 100% of the tax shown on your prior year's return (110% if your AGI was over $150,000). The penalty isn't massive - it's basically an interest charge on the amount you should have paid throughout the year. Current rates are around 8% annually, which likely exceeds what you'd earn in even the best HYSA.
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Michael Green
•Thanks for the info! So if I'm understanding right, even if I set my withholding to $0, I'd still need to make quarterly estimated tax payments to avoid penalties? Is there any scenario where I could legally hold onto all the tax money until filing time?
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Mateo Silva
•You've got it exactly right - you'd need to make quarterly estimated tax payments if you're not withholding. The IRS wants their money throughout the year, not just at tax time. There is one potential exception that might work for you. If your previous year's tax return showed zero tax liability (meaning you didn't owe anything at all), you might be able to avoid estimated payments for the current year. But that's pretty rare for most W-2 employees with regular income.
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Victoria Jones
I actually tried something similar last year using https://taxr.ai to calculate exactly how much I needed to withhold to maximize my cash flow without triggering penalties. Their withholding calculator uses the same formulas the IRS does for determining safe harbor amounts. Saved me from guessing and potentially facing penalties.
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Cameron Black
•Does it actually work for more complex situations? I've got W2 income plus some 1099 work and rental income. Most calculators I've tried oversimplify things.
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Jessica Nguyen
•I'm skeptical about these kinds of tools - how do you know it's calculating things correctly? The IRS changes their rules all the time, especially with the recent tax law changes.
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Victoria Jones
•It definitely handles complex situations - I have a similar mix of W2 and side business income. It breaks down exactly what you'd need to pay each quarter based on when you expect to earn different income types. For your question about accuracy, they actually update with every IRS change and show you the exact formulas they're using from the IRS publications. I was skeptical too, but I checked their calculations against what my CPA recommended and they matched perfectly.
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Cameron Black
Just wanted to follow up on my experience with taxr.ai that was mentioned earlier. Decided to try it after our discussion, and it was surprisingly helpful! It showed me that I was actually overwithholding on my W2 job while underpaying on my 1099 income. Helped me optimize both to avoid penalties without giving the government an interest-free loan. Pretty cool to see exactly where the safe harbor thresholds were for my specific situation.
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Isaiah Thompson
If you're dead set on minimizing withholding, you'll definitely need to talk to the IRS at some point. I spent HOURS trying to get through to them last tax season with questions about my withholding allowances. I finally used https://claimyr.com and their callback service got me connected to an IRS agent in about 20 minutes instead of waiting on hold all day. They have a demo video at https://youtu.be/_kiP6q8DX5c showing how it works. The agent confirmed I would face penalties for underwithholding without meeting safe harbor provisions.
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Ruby Garcia
•How does that service actually work? Seems fishy that they can somehow get you through faster than just calling the IRS directly.
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Jessica Nguyen
•This sounds like a total scam. The IRS doesn't let people jump the line because they paid some third-party service. I bet they just use bots to call repeatedly until they get through, which is why normal people can't get through.
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Isaiah Thompson
•It's not about jumping the line - they basically use an automated system that waits on hold for you. When an agent finally picks up, they call your phone and connect you. So you're still "waiting" the same amount of time, but you don't have to physically sit there listening to hold music. They actually explain how it works pretty clearly in that video I linked. It's not magic, just technology that saves you from having to waste hours of your day. The IRS has no problem with it because you're still going through their normal queue.
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Jessica Nguyen
Well I'm honestly shocked. I tried that Claimyr service despite thinking it was complete BS. Had been trying to reach someone at the IRS for THREE DAYS about my withholding calculation. Got a callback within 45 minutes and finally sorted out my issue. The agent walked me through the exact penalty calculation for underwithholding and confirmed I'd need to either withhold or make quarterly payments to meet one of the safe harbors. Saving me from a $780 penalty was worth it. Sorry for being so skeptical earlier.
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Alexander Evans
Just to add another option - if you're absolutely set on not having withholding, you could form an S-Corp instead of being a W-2 employee. Then you'd pay yourself a "reasonable salary" with proper withholding (can't avoid that part), but could also take distributions which aren't subject to withholding. You'd still have to make estimated tax payments on the distribution income to avoid penalties though. Plus there are costs to maintaining an S-Corp.
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Michael Green
•Thanks for the S-Corp suggestion. Would that really work for me though since I'm working in a family business? I'm not the owner - my parents are. Would I need to become a partial owner somehow for this approach to work?
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Alexander Evans
•You're right that this complicates things since you're not the owner. Your parents would need to be willing to structure the business differently - perhaps spinning off a portion for you to operate as a separate entity that contracts with the main business. It gets complicated and probably isn't worth it unless there are other business reasons to do this. A simpler approach might be to just calculate the minimum withholding needed to reach the safe harbor threshold (usually 100-110% of last year's tax liability) and then invest the rest yourself. That's probably the optimal balance of tax compliance and maximizing your money's growth.
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Evelyn Martinez
Everyone's overthinking this. I just claim 9 dependents on my W4 which cuts my withholding way down, then I pay quarterly estimated payments that are just barely enough to hit the safe harbor. Been doing it for years with no issues.
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Benjamin Carter
•Heads up - the W4 form changed significantly in 2020. There's no more claiming dependents like that. You now have to specify actual dollar amounts to withhold or not withhold. The old "claim 9 dependents" trick doesn't work with the new form.
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Liam O'Sullivan
I've been in a similar situation and here's what I learned the hard way: even if you're disciplined with money, the math usually doesn't work out in your favor. The underpayment penalty is calculated quarterly, so even if you pay everything by April 15th, you'll still owe penalties for each quarter you were short. The current penalty rate is around 8% annually, which breaks down to about 2% per quarter. Most high-yield savings accounts are only paying 4-5% annually right now. So let's say you underwithhold by $5,000 throughout the year. You might earn $200-250 in interest, but you could face $300-400 in penalties. The numbers just don't add up unless you can find investments yielding significantly more than the penalty rate. Your best bet is probably what others mentioned - calculate the minimum needed to hit safe harbor (usually 100% of last year's tax liability, or 110% if your AGI was over $150k) and then adjust your withholding to that exact amount. You'll still have some money to invest without triggering penalties.
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Malik Robinson
•This is exactly the kind of real-world math I was hoping someone would break down! I hadn't thought about the quarterly calculation aspect of the penalties. So even if I'm super disciplined and set aside the money, I'm essentially gambling that I can beat an 8% annual return just to break even on the penalties. Your safe harbor approach makes way more sense - get the exact minimum withholding to avoid penalties and then invest whatever's left over. Do you happen to know if there are any good resources for calculating that 100%/110% threshold accurately? I'd hate to miscalculate and end up with penalties anyway.
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