By the interest free loan logic, you should have your employer withhold zero and then you put your taxes in a high yield savings account and pay them all as late as possible.
The IRS already thought of this - they charge you interest on the money you owed them (with some exceptions, like waiving it the first year it happens, only charging you if you withheld less than last year, etc).
Yeah, it sucks that the IRS is such a buzz-kill here, with 4-5% HYSA's, it would be nice to just let all the taxes sit there and pay one lump sum in April.
I owed a decent chunk more one year due to investments I sold, and left the money in tbills since I knew I was withholding at least as much as the previous year.
You owe taxes all year round. What you're doing in April is settling up and filing for the year. If you run your own business, you're required to pay a lump estimated taxes 3 times a year in addition to your annual filings. If you're too short, you owe and you owe interest. The IRS has a safe haven rule where if you pay 90% of what you owed this year, or at least 100% of what you owed last year, they won't penalize you. It's actually one of the reasons I personally do over withhold. I do some contract work on the side, and rather than calculating and sending in estimated taxes every quarter, I just have my regular job send in about 25% of the contracting income I expect to make. On years when I did as much contract work as I expected, I basically get nothing back or I might owe $200. On years where I don't, sure I gave the government an interest free loan but I also didn't have to think about my taxes for the whole year.
Whenever these things are talked about in percentages it is worth bringing it down to dollars to make sure the effort is worth it - the average “interest” on a return is probably about $100 (4K return/2 * 5% - tax).
$100 isn’t nothing but it’s not everything either.
If you get a refund it means you overpaid your taxes. The amount you've overpaid can be considered a zero interest loan to the government. If you hadn't overpaid your taxes you could have invested that money.
