For many people, they are relieved to receive a refund check from the IRS after filing taxes. After a year of hard work and the stress of filing taxes, it feels good to receive this money to put in your savings account or make your budget more manageable for a while. However, it is possible to owe the IRS after you file your taxes.
Photo Credit: Tax Credits
You Might Owe the IRS Money if…
Essentially, the one huge, general reason why would you would owe is if you paid less tax during the year than your income level determines you should be paying. While the majority of people will get a refund after this tax season, it is estimated that more than 25 percent of the population will actually owe something instead. If you are asking yourself why do I owe taxes? Here are a few common reasons why you could actually owe the IRS money at the end of filing your taxes.
You are Self Employed
If you are self-employed, don’t have a boss, and did not pay taxes throughout the year, you will owe the IRS money that wasn’t withheld from your check, including income tax and self employment tax. Here’s more:
- If throughout the year, you took on a project or did work that you didn’t get taxed for, this can result in you owing. For example, if you did consulting work or did tutoring on the side, you will owe tax on your extra income. If you are a freelance writer, photographer, graphic designer, or anything along those lines, this will also pertain to you.
- When you are a normal employee of a company, you are most likely getting taxes withheld from your employer every time you get a paycheck. However, when you are a freelancer or contract employee, you do not get these taxes taken out. If that is the case, you are responsible for paying these taxes.
- If you are a freelancer or working for someone by a contract opposed to a paid employee, you should have been filing quarterly to make payments throughout the year. Unfortunately, in addition to having a higher tax at the end of the year, you are also subject to fees and penalties for not paying throughout the year.
- If you made the mistake of not filing quarterly or forgetting about these taxes, use this as a learning experience. This year, moving forward, choose to file quarterly instead. Keep track of all of your self-employment deductions to help offset your income.
Your W-4 Allowances Are Too High
If you are paid employee, you most likely filled out a W-4 when you started your employment at your job. (Remember that stack of paperwork you filled out when you were starting at this job way back when?) While filling this out, you may have modified the taxes withheld (by increasing the number of allowances) to increase the amount you are taking home. While it may seem like a more appealing option to take the higher paycheck, if your income level does not match the amount of taxes you paid throughout the year, you’re unfortunately going to have to owe more. In summary:
- If you modified this form and got larger paychecks throughout the year, you may now owe additional taxes if you did not withhold enough throughout the year.
- The good news is that you can modify your W-4 with your employer so next year you don’t have the same problem.
You Have Other Forms of Income
If you received unearned income from sources that did not tax you throughout the year, you are subject to pay these now during your annual tax time.
Some of these can types of income can include unemployment benefits, interest you received from your bank accounts, alimony, if you won the lottery or another sum of money, social security, or royalties received.
Read more: Surprising Things That Count as Taxable Income.
Your Filing Status Changed
If your filing status changes, there is also a chance you might owe instead of collecting a refund this year.
What to Do When You Owe the IRS
You owe the IRS money, and you weren’t expecting it. Take a breath. While it may be quite overwhelming and even a little scary to owe the government money, there are ways to cope with this. Fortunately, the IRS offers some advice for those of us who may owe this year:
- First of all, do not ignore it if you owe the IRS money. It is never a smart plan to ignore debt, regardless of the type it is. However, owing the government is even worse in some cases. The government can seize your property and financial assets if you don’t pay the debt. If you don’t pay, this will impact your credit as well.
- If you are paying by check, you may want to make a copy of the check for your records. Keep track of the check number and date you sent it as well for your records to show you paid by the tax deadline.
- You can also choose to pay the IRS by using a credit card. If you’ve been trying to deal with credit card debt, this might not be the best option for you. Increasing your credit card debt is never a good plan, especially if you are already struggling with it. However, if you have a lower interest rate than what the IRS will charge you, this may be the way to go.
- You can request an installment agreement from the IRS. If you owe less than $25,000 in combined tax, penalties, and interest, you can request an installment agreement at irs.gov. Be sure you understand what this installment agreement means and how and when to make payments. You may also be charged a fee for this as well as interest to what you owe.
Have you ever owed taxes when you thought you would actually be getting a refund? If you are a freelancer, how do you deal with owing the IRS? What are some ways people can get quick cash if they owe the IRS and weren’t expecting it?