Is It Normal to Owe Taxes? What to Do If You Do
Owe taxes? Learn why it's a common experience, how to address your tax bill, and simple ways to plan for next year.
Taxpayers often find they owe taxes at the end of the year. This occurs when the income tax paid through wage withholding or estimated payments falls short of their actual tax liability. Discovering a tax due amount indicates an imbalance between the amount remitted and the amount owed. Many individuals encounter this, and understanding the reasons can provide clarity.
Understanding Why You Might Owe
The United States operates on a “pay-as-you-go” tax system, requiring taxpayers to pay income tax as they earn or receive it. This is typically done through federal income tax withholding from paychecks or quarterly estimated tax payments. If these payments are less than the final tax obligation, a balance is due at tax filing time.
Insufficient wage withholding is a common reason for owing taxes. Employees provide their employer with Form W-4, Employee’s Withholding Certificate, which guides federal income tax withholding. If a taxpayer’s Form W-4 is not updated to reflect current financial circumstances, such as having multiple jobs, too little tax may be withheld. The Form W-4 now focuses on factors like additional income, deductions, and dependents to improve accuracy.
Earning untaxed income is another frequent cause. This includes earnings not subject to regular withholding, such as from freelance work, the gig economy, rental income, or investment gains. Since no employer withholds taxes from these income streams, taxpayers are responsible for proactively setting aside and paying taxes on these earnings. Failing to account for the tax due on such income sources can result in a tax bill at year-end.
Changes in life circumstances can also significantly impact tax liability, leading to an unexpected amount due. Events such as marriage, a spouse starting work, or receiving a large bonus can increase a household’s total income, potentially pushing them into a higher tax bracket. If withholding or estimated payments are not adjusted promptly to reflect these changes, the amount paid throughout the year may no longer be sufficient to cover the increased tax obligation.
A reduction in anticipated deductions or tax credits can also contribute to owing taxes. Taxpayers may find they no longer qualify for certain deductions previously claimed, such as itemizing, or that eligibility for certain tax credits has changed. If a taxpayer’s income increases beyond certain thresholds, they may qualify for fewer credits, directly increasing their overall tax liability.
Paying Your Tax Bill
Once a taxpayer determines they owe federal income taxes, several methods are available for submitting payment. The Internal Revenue Service (IRS) offers convenient online options, including IRS Direct Pay, which allows payments directly from a checking or savings account without any fees. Taxpayers can also pay using a debit or credit card through third-party processors, though these services typically charge a processing fee. Electronic Funds Withdrawal (EFW) is another option, allowing payment to be made during the e-filing process. Payments can also be made by check or money order, mailed with Form 1040-V, Payment Voucher, to the appropriate IRS address.
For taxpayers unable to pay the full amount due by the April 15 deadline, the IRS offers various payment arrangements. A short-term payment plan may provide up to an additional 180 days to pay the balance in full, though interest and penalties continue to accrue. This option is generally available for individuals owing less than $100,000 in combined tax, penalties, and interest.
A long-term payment plan, also known as an installment agreement, allows taxpayers to make monthly payments for up to 72 months. Individuals typically qualify if they owe $50,000 or less in combined tax, penalties, and interest and have filed all required returns. While on a payment plan, interest and penalties continue to apply, but the failure-to-pay penalty may be reduced. The IRS also has an Offer in Compromise (OIC) program, which allows taxpayers to settle their tax debt for a lower amount if they demonstrate an inability to pay the full liability without significant financial hardship.
Planning for Future Tax Years
To prevent owing taxes in subsequent years, employees can adjust their federal income tax withholding. This involves reviewing and updating Form W-4, Employee’s Withholding Certificate, with their employer. Significant life events, such as marriage, the birth of a child, or changes in income, are opportune times to revise withholding. The IRS provides a Tax Withholding Estimator tool on its website, which guides individuals through calculating the appropriate withholding amount to avoid underpayments or overpayments.
Individuals with income not subject to withholding, such as self-employment income, rental income, or investment earnings, should make estimated tax payments throughout the year. These payments cover income tax and self-employment tax (Social Security and Medicare taxes) and are typically paid in quarterly installments. The due dates for these payments generally fall in April, June, September, and January of the following year.
Reviewing one’s financial situation annually helps anticipate potential changes in income, deductions, or credits that could affect tax liability. Using tools like the IRS Tax Withholding Estimator or consulting tax guidance can help project taxable income and adjust payments accordingly. Accurate planning helps ensure that enough tax is paid throughout the year, minimizing the likelihood of a tax bill at filing time.