If you work as an employee for someone else, taxes are taken out of every paycheck you receive. But that isn’t always the end of your tax bill. While many people look forward to an anticipated refund during tax season, certain situations could result in a sizable tax bill instead. If you end up owing the IRS money when you file your taxes, it could be for one of these four reasons.
You Didn’t Withhold Enough
By updating your W-4 form, you can make sure that the correct amount of taxes is withheld from your paychecks to reduce or eliminate your tax bill during tax season. As exciting as it is to get a big refund when you file your tax return, your goal should be as close to $0 as possible if you want more of your money available to you throughout the year.
You can file a new W-4 with your employer whenever you like. The more allowances you claim, the less tax is withheld from your paychecks. Unless you are retired or self-employed, your W-4 is usually the biggest factor in determining whether you receive a refund or owe taxes.
You Are Self-Employed
I’m self-employed, so do I owe the IRS? The quick answer to that question is yes. Because you are your own employer, there will be no taxes coming out of your pay, which means you will be responsible for making sure the IRS gets its share. If you are self-employed, you may need to pay estimated taxes quarterly.
Paying quarterly is important because it reduces your eventual tax bill during tax season. It can also help you avoid penalties. Of course, making these estimated payments can be easier said than done, especially if you are struggling financially or your business is still getting off the ground.
If you’re self-employed but your spouse works as an employee, your spouse can elect to have more money withheld from their paycheck to offset the amount you’ll have to pay on Tax Day. Also, make sure you’re taking any businesses deductions you qualify for to reduce your taxable income. These may include office supplies, education, or business use of the home if you have a home office.
You Have Income Not Subject to Withholding
There are many forms of income that are not subject to withholding, which means money is not taken out for taxes before you receive the income. Forms of income that are not subject to withholding include rental income, alimony, capital gains, dividends, IRA and 401(k) distributions, unemployment benefits, and interest earnings.
Your Tax Return Has Major Changes
If anything major has changed since the last tax year, you may be in for a surprise when it comes time to file. For example, if any of your kids moved out of the house, you can no longer claim them as dependents. Refinancing a mortgage at a lower rate can also drastically reduce your mortgage interest deduction. Always adjust your withholding when your situation changes to make sure it accurately reflects your allowances.
Taking control of your taxes doesn’t need to be complicated. VTax provides affordable and accurate professional tax preparation assistance with the convenience of having your taxes prepared from anywhere. Learn more about VTax and find out how we can help you your maximum refund, guaranteed!