While many people receive a refund of money owed to them when they file their taxes, some people do find that they owe money to the government instead. Generally, this can happen if you are not having enough money withheld from your paychecks to cover your taxes or if you have other income, like from investments or a business, that aren't covered by your withholdings. If you will owe money for more than one year, you may have to use the quarterly estimated tax process to pay in advance to avoid penalties.
Why You May Owe Money
If you only receive money from your regular paycheck from your employer, you should be able to adjust your withholdings so that you don't owe money. Fill out Internal Revenue Service Form W-4 to effectively tell your employer how much to withhold from your checks.
The form will ask you questions about your family status, such as whether you're married, single or filing as head of household, and whether you have children or other dependents. Some of the questions also depend on your income. If your family situation or income changes, you may want to refile the form with your employer to adjust your withholdings. If you have too much tax withheld, you're effectively giving a free loan to the government, but if you have too little withheld, you may owe money at tax time.
Other income or capital gains from things like investments, the sale of a home that's gone up in value or even gambling winnings often won't be covered by withholdings. If your withholdings cover your paycheck, you may still owe tax if you have additional income. For example, if you do freelance work as an independent contractor, your clients won't withhold taxes from what they pay you. You are responsible for paying SECA, or Self-Employment Contributions Act, taxes yourself. These self-employment taxes include Social Security and Medicare contributions. Similar to Federal Insurance Contributions Act, or FICA, taxes that employees must pay half of, independent contractors are responsible for 100 percent of SECA taxes, but may deduct half of this amount on their personal income tax return.
If you expect to owe $1,000 or more in tax, you may be required to make estimated tax payments or face a penalty at tax time. Use Form 1040-ES to figure out how much you're required to pay and make quarterly payments throughout the year. If you pay at least 90 percent of your total tax through estimated tax and withholdings, or you pay at least 100 percent of your previous year's total tax, you generally will not owe any penalty.
Some states may also require you to pay estimated tax throughout the year if you will owe your state tax authority money.
IRS Fraud Alert
If someone contacts you claiming to be from the IRS and saying you owe some sort of IRS balance on your taxes, be wary. Scammers have impersonated the IRS by phone and email to demand money from people that they're not entitled to.
The IRS will generally send you letters in the mail before calling for an overdue tax bill. If someone calls or visits you and demands an immediate payment, or threatens to revoke your driver's license or have you deported, they are very likely not from the IRS. Contact the IRS or the police if you get such a fraudulent call or visit. You can ask to see identification from any legitimate IRS employee.
2018 Tax Law Changes
Tax law changes for 2018 don't affect the basic principles of what may cause you to owe money to the IRS, but changes in tax rates, deductions and credits may affect whether you owe money and how much you owe.
Generally, tax rates are going down for most taxpayers, though some deductions are also being eliminated, so check your own tax situation and consider checking with a tax professional to make sure your tax situation is still right.
Steven Melendez is an independent journalist with a background in technology and business. He has written for a variety of business publications including Fast Company, the Wall Street Journal, Innovation Leader and Ad Age. He was awarded the Knight Foundation scholarship to Northwestern University's Medill School of Journalism.