It’s safe to say most employees would like to get immediate take-home pay increases. And they can have it – starting with their next checks.

All they have to do is change their W-4 forms to avoid overwitholding. Federal law allows employees to revise their W-4s any time of the year.

Big tax refunds are bad

Economists say most people fill out W-4s too conservatively, and rarely change them after starting a new job. Of course, most people who claim too few W-4 exemptions do get bigger income tax refunds every April. But they’re essentially giving an interest-free loan to Uncle Sam for the majority of the year, and taking the money out of their own pockets.

Three common areas where employees often overlook W-4 exemptions they’re entitled to:

• childcare tax credits. Employees who pay someone to watch their child or dependent while they work may qualify for a tax credit on their W-4. Click here for official IRS regs.
• earned income credit (EIC). Lower- income employees may qualify for the EIC. Often, they can also claim an additional, smaller state EIC tax credit on state taxes.
• IRA contributions. Employees can get an immediate tax break on
  their expected contributions to a tax-deductible (non-Roth) IRA.

Fear of IRS hassles

Another reason people overwithold is they’re afraid of facing IRS penalties if they make a mistake on their W-4. But as long as someone has paid at least 90% of his or her taxes owed for the year, there’s no penalties owed for correcting an honest error on the difference.

As a safety net, some people put the extra money from each paycheck into a money-market account. That way, they’re covered on taxes and earn a little more interest on the money than if they put it in the bank.