What Causes People to Owe Money After Filing Taxes?

What Causes People to Owe Money After Filing Taxes?
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Are you wondering, “How come I always owe taxes after filing my returns?”

Well, you are not alone. In 2020, over 11.2 million Americans owed the IRS about $125 billion in back taxes. So, what would cause you to owe taxes? And what would happen if you did?

What Would Make You Owe Taxes?

Why do people owe taxes while others always get a refund? Well, several issues may contribute to you owing money to the IRS. Below are some of them.

1. Your Tax Withholdings Are Inaccurate

The employer is usually required to withhold some of your earnings and pay it directly to the IRS on your behalf. It acts as a credit against your annual income tax. If too much money was withheld from your paycheck at the end of the year, you will receive a refund. But if too little money was withheld, you will owe the IRS the difference.

Generally, 30 percent​ of your U.S.-based income is usually withheld and paid to the IRS. However, your situation will determine whether you will pay taxes at that rate or pay less or more. It depends on your deductions, citizenship status, whether you are filing individually or as part of a couple and whether you have dependents and how many they are.

Suppose your situation changes and you don’t account for it. In that case, the information you provide on Form W-4 becomes inaccurate if your employer uses the previous details to withhold taxes from your paycheck. As a result, you may end up owing taxes since the amount sent to the IRS will not be enough.

2. You Did Not Account For Other Income Sources

Some incomes sources, such as gambling winnings and freelance earnings, are usually unaccounted for within your tax withholding information submitted to your employer.

For example, if you win a lottery, you may be responsible for withholding the taxes you will owe, especially if you live in a state that does not tax winnings. That’s because you still have to pay 24 percent ​in taxes at the federal level.

While gambling winnings are fully taxed, they are unlikely to be accounted for when you submit the tax withholding information. For that reason, the taxes your employer pays on your behalf from your paycheck are unlikely to account for them.

And you have to account for them as other income on Form 1040. Failure to do so may leave you wondering later on, “Why do I owe money in taxes?”

3. You Did Not Factor Your Employer Responsibilities

If you are self-employed, you may be required to pay taxes both as an employer and employee of your business in some circumstances.

For example, you would be required to pay self-employment taxes that cover twice the payroll tax contributions you would have made if you were employed. These taxes would cover Social Security and Medicare.

So, instead of paying ​7.65 percent​, you will need to pay ​15.3 percent. Therefore, if you forget and pay only half, you will end up owing the IRS the other half at the end of the year.

4. You Did Not Factor Local Taxes

If you forget that states charge some forms of tax, you may end up asking, “Why do I owe money in state taxes?”

When you live and do business in certain states, they may charge you income and payroll taxes. You may also be expected to pay sales and excise taxes. In addition, you may end up having to pay taxes on gifts and earnings from the assets you inherit.

It would be a mistake to ignore the state and municipal taxes for those reasons. And if you do so, you may owe money after filing taxes.

What Happens If You Owe The IRS Money?

If you owe money after filing taxes, you should reach out to the IRS and agree to pay what you owe partially or fully. Failure to do so will attract interest on the amount you owe until you pay it off.

For example, if you fail to file, the penalty is five percent ​of the tax you owe for every month or part of the month your tax return delays. However, the total penalty will not exceed ​25 percent​ of the taxes due. On the other hand, if you fail to pay on time, you will be charged an interest of ​0.5 percent​ of the unpaid taxes for each month or part of the month until you pay off your debts.

However, if you agree to pay your taxes in installments, IRS will reduce the penalty to ​0.25 percent​ for each month or part of the month the agreement stays in place.

It is best to ensure you stay on top of your finances to avoid paying too much in taxes. The more you owe the IRS, the more interest the unpaid balance will accrue. And in the end, you will pay excessively for your mistake.