Deciding how much tax to have withheld from your paycheck is not as easy as it sounds. Many factors need to be considered, and everyone's situation is different. Workers who derive 100 percent of their income from a single job will have different considerations than those who do consulting work on the side or those who work an additional job to make ends meet.

Look at Last Year's Return

The best place to start your tax planning is with last year's tax return. Grab a copy of the tax return you filed last year and take a look at the bottom line number. If you ended up with a huge refund you were essentially lending money to the government all year--at 0 percent interest. To even things out you may want to increase the number of exemptions you claim on your W4. You will likely end up with a smaller refund, but you will also have a fatter paycheck.

Avoid the Unerpayment Penalty

On the other side of the spectrum is the dreaded underpayment penalty. If you fail to have enough money withdrawn from your paycheck you could end up owing a significant amount of money at the end of the year, and that could trigger a penalty from the IRS. The best way to see if an underpayment penalty could be lurking in your future is to run the numbers through your favorite tax preparation software. You can estimate your earnings by using your most recent pay stub and extrapolating the numbers for the entire calendar year.

Independent Contractors and Consultants

If you are trying to make ends meet and bring in extra money, consulting work can be a good choice. The hourly rate you can make as a consultant is likely to be higher --perhaps much higher--than you could make as a traditional employee, but this comes at a price. Consultants typically work as independent contractors, which means they are responsible for making their own tax payments. If you are working as an independent contractor and as a regular employee it is a good idea to ask your employer to withhold at least an extra 25 to 30 percent from your paycheck to cover any additional taxes from your consulting work.

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Tax withholding