Years ago when I was just a little sapling starting out in the professional world, I was given a W-4 and asked to write down how many allowances I wanted. I was told it was for tax purposes. But, I had no idea what it meant or how it would affect my paychecks.

Now that I know a thing or two about finances and how taxes come into play, I often hear people grappling with whether they should choose one or zero for allowances. I’ll let you in on a little secret — the difference is not that big. However, there are a few things that are important to understand. Plus, depending on your financial situation, either option may benefit you.

I like to think of the amount you claim on your taxes (if you’re struggling between one and zero) as more of a preference than anything else.

What It Means to Claim a Smaller Number vs. Higher

Generally speaking, the less you claim, the more taxes are withheld from your monthly paychecks. This means your checks will be smaller. The more you claim, the fewer taxes are withheld, and your paychecks will be bigger.

There are many reasons why people claim more or less on their W-4s, but if you need the extra money each month and are okay with owing at the end of the year (as this may be the case if you claim a high number), then it might make sense for you to do it this way.

However, if you’re okay with living with a smaller paycheck and having a lump sum come your way during tax season, then you may want to claim a smaller number, such as one or zero.

For example, a friend of mine who wasn’t married or had kids claimed 10. She wanted more money from her monthly paychecks. When it was tax time, however, she ended up owing close to $4,000.

When you first start working at a place of employment, they usually ask if you to fill out a W-4. This requires you to put down how many you want to claim on your tax return.

If you’re grappling with the claiming one or zero, here’s what you should consider.

You’re entitled to one allowance for yourself of a dependent, but just because you are doesn’t mean you absolutely have to. You can still claim zero. If you claim zero, it means the most amount of taxes will be withheld from your paycheck.

Claiming Zero

If you decide to claim zero, you should know that:

  • The maximum amount of taxes will be withheld from each paycheck
  • You’ll most likely receive a refund come tax time (in April)
  • You should claim zero if someone else claims you as a dependent on their tax return (i.e. If you’re still in college and your parents claim you)

Claiming One

If you decide you want to claim one, you should know that:

  • It may be a good option if you’re single and have only one job/source of income
  • You’ll most likely receive a refund during tax season
  • You may also break even (get nothing back but owe nothing)
  • You may also end up owing

Pros of Claiming One: You Can Get More Money Each Month

If you decide to claim one, you will have fewer taxes taken out of your check. This means you’ll have more in your monthly paychecks to pay off debt. Do you have high-interest credit card debt?

You should make it a priority to pay off debt before you start saving money in an interest-bearing savings account. The reason for this simply boils down to interest rates.

An online savings account has an interest of around 1 percent while your credit card’s interest rate may hover at 20 percent. That’s a big difference.

To illustrate that difference, let’s say you had an extra $500 each month because you claimed one instead of zero. That $500 could be put into savings.

Let’s say you’re starting from scratch and have nothing saved. This would mean you’d be able to earn $5 in interest from the bank. That’s enough to buy a large cup of coffee. Not much.

If you have $1,000 in credit card debt that has an APR of 20 percent, you’d be paying $200 in interest. Breaking it down this way shows that paying off your high-interest debt with your higher monthly paychecks makes more sense.

If you don’t have a lot of debt, you could use that money to put into a savings account. Or, you could even put it towards long-term investments.

So, Should You Claim Zero?

If you don’t have a lot of high-interest debt to pay off and you’re fine with having the maximum amount taken out for taxes, claim zero. Your paychecks will be smaller each month. But, you’ll have a nice lump sum come tax season to be able to throw into an emergency fund or savings account.

Of course just because you claim zero doesn’t mean you’ll automatically get a lump sum back. If you have other streams of income, you may not qualify. This assumption is if you only have one stream of income.

You can also use the refund money to fund some of your IRA for the following year.

Contrary to the example of the friend who claimed 10 on her W-4, I had a work colleague who always claimed zero on his taxes because he felt it was the most simplistic way to “set it and forget it” to get a refund each year. He was married and had two kids but still claimed zero.

Other Forms of Income

If you have outside streams of income, you may want to claim zero to avoid owing income taxes at the end of the year. This is exactly what I was advised to do from my tax accountant when I was launching my own company during the tail end of my employment with my last company.

However, it really depends on the amount of income and your overall financial situation as well. You should talk to a tax professional if you’re unsure how to proceed.

If You’re 1099

If you don’t work for an employer but do contract work or work for yourself, you may want to consider making estimated tax payments to lessen the amount of taxes you pay during tax time. Estimated taxes allow you to “prepay” some of your taxes each quarter.

Bottom Line

So, before you decide between zero, one, or a higher number of allowances, think about how much debt you want to pay off in the year.

Having some extra wiggle room to help you alleviate that debt. It can also set you up for other financial goals to tackle, such as saving for an emergency fund or putting money towards your IRA.

If you’re still unsure what to do, talk to your accountant. You can also ask how many allowances your friends, family members, or colleagues claim. Everyone seems to have a differing opinion about this, but make sure to do what’s right for you and adjust the numbers accordingly for the following year.

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