Maximizing Your Tax Strategy: Should You Adjust Your Withholding?
For high-income earners and business owners, tax planning is about strategic cash flow management, not just whether you’re getting a refund. While a big refund may seem like a financial win, it often signals missed investment opportunities or inefficient tax planning. On the other hand, underpaying can leave you facing penalties and an unexpected tax bill. Let’s break down how withholding works and whether adjusting yours could be a smart financial move.
How Tax Withholding Works (And Why It Matters for High Earners)
For W-2 employees, withholding is the amount of federal tax your employer deducts from each paycheck based on your W-4 form. However, for high earners and those with multiple income sources, standard withholding tables don’t always get it right, potentially leaving you overpaying or underpaying throughout the year.
Withholding too much → A large refund, but your capital is tied up with the IRS instead of earning returns.
Withholding too little → More take-home pay now, but potential penalties for underpayment or a surprise tax bill in April.
What Impacts Your Withholding?
Your total income, including salary, bonuses, RSUs, and passive income
Your filing status (Single, Married, Head of Household)
The number of dependents or tax credits you claim
Additional tax preferences you specify on your W-4
State and local tax implications (especially in high-tax states)
Why This Matters for High Earners:
Bonuses & Equity Compensation – Many employers withhold at a flat 22% rate on bonuses and stock-based compensation, which may not cover your actual tax liability if you’re in a higher bracket.
Investment Income – If you have dividends, rental properties, or capital gains, these aren’t factored into your W-2 withholding.
Alternative Minimum Tax (AMT) Risk – High earners may be subject to AMT, requiring additional withholding adjustments to avoid a tax bill.
Is It Time to Adjust Your Withholding?
Your tax withholding should align with your broader financial strategy. Here’s when it might make sense to make an adjustment:
If You Prefer a Larger Refund
You like the security of knowing your taxes are covered.
You use your refund as a way to automatically set aside savings.
You have complex tax situations (RSUs, K-1 income, etc.) and prefer to avoid underpayment penalties.
The Downside?
A large refund means you’ve given the IRS an interest-free loan instead of investing that money throughout the year.
If You Prefer More Take-Home Pay Throughout the Year
You’d rather put your money to work now by investing, saving, or paying down debt.
You want more control over your cash flow for business investments or large purchases.
You understand tax strategy and want to withhold just enough to avoid penalties, but no more than necessary.
The Risk?
If you underpay, you could owe a significant tax bill at year-end, plus potential penalties if you don’t meet safe harbor requirements.
How to Adjust Your Withholding for Tax Efficiency
STEP 1: Run a Withholding Check-Up
Use the IRS Tax Withholding Estimator to see if your current withholding aligns with your expected tax liability.
Work with your tax advisor to review your total income picture, including salary, bonuses, RSUs, business income, and investments.
Step 2: Adjust Your W-4 Form
Want to increase cash flow? Adjust your W-4 to reduce excess withholding.
Prefer to avoid surprises? Increase your withholding to cover bonus and investment income.
Have multiple income sources? Adjust your W-4 to account for estimated tax payments on non-W-2 income.
Step 3: Review Withholding Annually
Bonuses, stock sales, or new income sources? Reevaluate mid-year to prevent shortfalls or overpayments.
State taxes change? Some states don’t align with federal withholding. Make sure state estimates are covered.
Tax law updates? New policies could impact deduction limits and tax brackets, making annual reviews essential.
Take a Proactive Approach to Tax Planning
At The Purple Group, we work with high-net-worth individuals and business owners to create tax-efficient strategies that align with your bigger financial picture. Whether it’s optimizing your W-4, managing RSU and stock sales, or coordinating business income with tax planning, we ensure your money is working for you and not sitting with the IRS.
Let’s fine-tune your tax strategy for the year ahead. Schedule a consultation today!
