A lot of people wonder why they owe taxes.
If you are an employee, the main reason why you would owe taxes to the IRS is because you didn't have your paycheck tax withholdings correct.
When you start a new job, your boss will ask you to fill out tax paperwork, including a W-4 form. On the W-4, you will have to choose how many dependents you have.
This worksheet can be rather confusing.......
The more dependents you claim on your W-4, the less taxes you will have taken out of your paycheck, but the more taxes you will owe the IRS when you file your tax return.
There's a debate amongst people about whether or not to strive to get a refund.
Interestingly, the IRS recently revealed that 80% of tax returns are refund returns. If you receive a refund when you file your tax return, you're having more than what you need to be withheld from your paycheck and you're giving it to the IRS interest-free. There are two schools of thought on this:
- If you're not a good saver and you spend whatever hits your pocket, then it's not a bad strategy to put away a little extra and get a refund in April. If you know that you cannot save money, you can use the IRS as your “piggybank”. Then, when you file your tax return, you'll get a refund that you can use for things like paying your real estate taxes, going on a vacation, or paying down debt.
- On the other hand, if you are a good saver, then you should have a goal of breaking even at the end of the year. This would mean claiming the exact number of dependents in your house on your W-4. You will have more money hitting your pocket every paycheck. You would be able to defer some of that money into an interest-bearing savings account. At the end of year, you will not get a big refund from the IRS. Again, your goal would be to break even when you file your tax return
This would save you on interest and penalties. If you don't like to pay quarterly, then just know that when you file your tax return the following April, you'll owe that tax plus interest and penalties for not prepaying. Think of it like this: Just as a W-2 wage earner’s boss withholds taxes every paycheck and then submits it to the IRS every week, the IRS wants you as a self-employed person to send in your taxes in real time, while you make the money during that year. Otherwise, they will charge you interest and penalties.
What if you got behind financially and now owe a lot of money on this year’s tax return?
Many people I have worked with who owed taxes, felt that if they did not file their tax return, somehow the IRS wouldn’t come after them to pay. However, the truth is that eventually it will catch up to you and eventually you will have to pay. The IRS can collect on your unpaid tax return for up to 10 years after you file. If you don’t file, the 10 years gets extended until you file. This makes it important to just file your tax returns on time. You can always work out a payment plan with the IRS. As soon as they send you a letter in the mail, you can go online and request an online payment arrangement at IRS.gov. Another option is you can hire your accountant to do that work for you to negotiate a payment plan.
I work with a lot of clients who for many years knew they would owe and so they didn't file tax returns. It ended up costing them far more money in the long run compared to the amount they would have owed if they just filed in the first place.
If you owe, you can file a tax return and not pay and the IRS will send you notices. You have at least three months before they will take collection action because they have to send you three notices spaced 30 days apart.
With this in mind, a good strategy would be to file your tax return and start gathering the money to pay for it or figure out a payment amount you can afford each month. If you owe less than $10,000 for all years, you can get an automatic online payment agreement at IRS.gov.
If you owe more than $25,000, you may have to provide proof of income and expenses to get a payment plan if you are self-employed.
Bottom line, the reason why you always owe the IRS could be solved by doing small things such as adjusting your W-2 withholdings, paying in quarterly if you are self-employed, or filing your taxes timely.