Why Do I Owe Taxes This Year? 7 Common Reasons Explained

Unexpected tax bills and liabilities are not that uncommon, which is why many people find themselves asking, “Why do I owe taxes this year?” A simple answer to this question is that you owe the IRS more than you’ve already paid, but there are many cases as to why this situation occurs, and plenty of nuance surrounding it.

This article explores the most common reasons why you might owe taxes this year, even if you think you’ve fulfilled all your duties as a taxpayer. Apart from analyzing these, we’ll provide you with tips and strategies to help you prevent these instances from happening again in the future, and show you what to do in case you can’t pay your tax bill.

Key Takeaways

• Some of the key reasons why you might owe taxes this year include your employer not withholding enough from your paycheck, and you having additional income without withholding.
• Losing or changing a job, claiming too many credits or deductions, and having changes in life events can also lead to unexpected tax liability.
• To prevent owing taxes, regularly update your Form W-4, track all income, make quarterly estimated payments if you’re self-employed, and consult a tax professional if you need assistance.
• If you can’t pay your tax bill, file your return on time, pay what you can, request an extension or a payment plan, and consider an offer in compromise.

Why You Might Owe Taxes This Year: 7 Common Reasons

Let’s go through some of the most common reasons for owing taxes that you might not be aware of.

#1. Employer Didn’t Withhold Enough From Your Paycheck

One of the main reasons you may owe taxes this year could be that your employer didn’t withhold enough from your paycheck. A common reason this happens is due to incorrect information on your Form W-4, Employee’s Withholding Certificate.

An incorrect Form W-4 can happen for many reasons, including an incorrect filing status or failure to account for other types of income. If you submit this form to your employer, they may withhold less than needed to match your tax liability.

If not enough taxes are taken out of your paychecks, it creates a deficit, which you’ll have to pay off after filing your tax return. Breaking even or owing a small amount is the best circumstance that you can be in.

Even being due a tax refund isn’t optimal, as it means that you’ve essentially given the government an interest-free loan before being repaid.

#2. You Had Additional Income Without Withholding

If you had income from sources other than your primary employment and taxes haven’t been withheld from it, you may still owe taxes at the end of the year. This income can stem from side hustles, freelance work, independent contracting, investment returns, and more.

W-2 vs. 1099 income is treated differently for tax purposes; failure to account for these differences and fulfill your obligations can result in late penalties with interest.

Even if your employer correctly withheld taxes from your paychecks on your main job, it’s still your responsibility to do the same for other income streams. They typically don’t have automatic withholding, which is why you need to do that each month or pay quarterly estimated taxes if you meet the criteria.

#3. You Lost or Changed Jobs Mid-Year

Losing or changing your job in the middle of the year can make your tax situation complicated. When you start a new job, your employer will calculate withholdings based on the salary they offered, and assuming that it will stay that way until the end of the year.

Any changes compared to your previous employment can result in disparities and under-withholding, especially if your new job pays you more than your old one. Moreover, any unemployment benefits that you receive are also taxable.

Should you opt for tax withholding on these benefits, the default rate is only 10%. That may not be enough to cover the entirety of your tax liability, especially if you have other sources of income. That’s why it’s essential to consider all sources of income that you may have, especially if you’re currently out of a job.

#4. You Claimed Too Many Tax Credits or Deductions

Claiming tax credits and leveraging deductions is one of the best ways to reduce your tax liability, but doing so incorrectly can result in an unexpected tax bill after filing. This often happens when taxpayers overestimate their eligibility for some deductions or the criteria for credits that they’ve already been claiming change.

For example, receiving an advance payment of a tax credit (e.g., Child Tax Credit) can result in tax liability if the circumstances change during the year and the recipient becomes ineligible for it. Their income may have increased and, as a result, they now have to pay back a portion of the credit.

That’s why it’s critical to review the requirements for any credits or deductions that you claim. Whenever your circumstances change significantly, ask yourself, “Will I owe taxes this year?” and you’ll avoid unwelcome surprises during the tax season.

#5. Changes in Tax Law

Tax laws can change, and these changes often impact your tax liability. For instance, alterations to tax brackets or standard deduction amounts can increase or reduce how much you have to pay in taxes.

A notable example from recent history includes the Tax Cuts and Jobs Act (TCJA) of 2017, which reduced individual tax rates, increased standard deductions, and reduced taxes on corporations.

The newest changes implemented in the One Big Beautiful Bill Act made several tax brackets permanent, increased standard deductions, and the child tax credit, among other changes.

While most of these modifications resulted in a reduction in tax liability, that’s not always the case. That’s why it’s important to keep track of current tax laws and adjust your withholding and relevant documentation to account for them. Otherwise, you might find yourself asking, “Why do I owe taxes this year when nothing changed?”

#6. Changes in Life Events

Various circumstances in your everyday life influence your taxes, and changes to them can result in unexpected liabilities. If you don’t adjust your withholdings or adjust the way you fill out your returns, you may end up owing the IRS.

A common change in life events includes getting married or divorced. This changes your filing status, which then influences your tax bracket and standard deduction. Also, in the same way that having a child makes you eligible for a Child Tax Credit, having a child age out of dependent status will likely increase your tax liability.

Other events that can impact your tax liability include buying a home, retiring, or drawing from retirement accounts.

#7. Mishandling Self-Employment Taxes

Self-employment income taxes from 1099 work are treated differently from W-2 employment taxes. One of the biggest differences is that there’s no employer to withhold taxes from your paycheck, which means you’re fully responsible for FICA taxes (Social Security and Medicare taxes).

As a self-employed individual, you need to cover the entire sum of 12.4% for Social Security and 2.9% for Medicare. This is in contrast to traditional employees who split the responsibility with an employer, only paying 6.2% for Social Security and 1.45% for Medicare.

Due to this disparity in calculating taxes on W-2 vs. 1099 income, treating self-employment as traditional work means you’ll only pay half of what you owe, resulting in unexpected liability at the end of the year.

How to Prevent Owing Taxes in the Future

Let’s show you how to avoid owing taxes and remain compliant going forward.

#1. Review and Update Your W-4 Form Regularly

Your Form W-4 is the most important document for calculating and managing your tax withholding. However, some taxpayers make the mistake of approaching it in a “set and forget” manner.

As previously mentioned, changes in your life (e.g., getting married or divorced, or having a child) can lead to changes in your tax liability. These changes need to be reflected in your Form W-4, which is why you need to update it and send it to your employer again. This will prevent you from running into issues with underpaid tax withholding.

#2. Track All Sources of Income Throughout the Year

It’s vital to track income from all sources, not just your primary employment. While your main salary may represent the majority of your total earnings, any other type of income can also be taxable, increasing your tax liability.

Tracking sources of income is especially important for earnings that aren’t subject to automatic withholding. You can use that information to adjust your Form W-4 or pay estimated tax and avoid owing money to the IRS.

#3. Make Quarterly Estimated Payments If Self-Employed

If you’re a self-employed professional, you are typically required to make quarterly estimated tax payments. This includes freelancing, independent contracting, side hustles, and any bigger income that isn’t subject to withholding.

The IRS provides a Form 1040-ES, Estimated Tax for Individuals, to help you calculate, report, and pay these taxes. The deadlines are typically April 15, June 15, September 15, and January 15. These payments help you avoid underpaying and incurring penalties when you file your annual return.

#4. Use a Tax Calculator or a Professional for Planning

If you’re not sure whether you owe taxes this year or want to ensure accuracy and avoid making mistakes, you should use a tax calculator or consult a professional. The IRS offers the Tax Withholding Estimator, which is a great official tool for employees.

Additionally, many third-party tools can help you estimate your tax bill based on various aspects, like your income, credits, and deductions. For instance, Paystub.org offers several generators that automatically calculate taxes based on your inputs.

What to Do If You Can’t Pay Your Tax Bill

Being unable to pay your tax bill when it’s due can be stressful. Fortunately, there are several things you can do to address the situation and avoid incurring penalties.

Here are some steps you can take:

• File your tax return on time. You should fill out and file your Form 1040 (and relevant schedule forms) on time, even if you don’t have enough to pay your tax bill immediately. This avoids the failure-to-file penalty.

• Pay what you can. Even if you can’t pay the entire bill, paying what you’re able to reduce any potential penalties and interest in the future.

• Request an extension. If you have a valid reason, you can request a short-term payment extension.

• Apply for a payment plan. These plans allow you to pay in installments over a period of up to 72 months, making a tax bill much more manageable.

• Consider an offer in compromise. An offer in compromise allows taxpayers to pay less than what they owe the IRS if the payment would put them in severe financial hardship. However, the requirements are strict, and the IRS approves this on a case-by-case basis.

Prepare for the Tax Season with Paystub.org

Paystub.org offers robust and intuitive software tools that you can use to generate business and tax-related documents. Our key tools are:

• Pay stub generator. Leverage professional templates and a built-in calculator to effortlessly determine gross income, tax withholding, deductions, and net income.
• Form W-2 generator. Effortlessly generate accurate year-end tax forms for your employees.
• Form 1099 generator. Keep track of payments made to independent contractors and report them with ease using our Form 1099 generator.
• Invoice generator. Track your income from self-employment and bill your clients using professional invoices.

Final Thoughts

Hopefully, now you have a clear answer to the “Why do I owe taxes this year?” question. While many factors influence your tax liability, keeping track of your income and changes in your life’s circumstances will help you stay on top of the situation. This will help you avoid issues like not accounting for changes in tax laws or having insufficient withholding.

Don’t forget to proactively change and manage your Form W-4, to leverage online tools for tax calculation and management, and to consult tax professionals if you need help. Lastly, if you’re a self-employed professional or you’re running a small business, check out document generators at Paystub.org to save time and improve your administrative efficiency.

Why do I Owe Taxes This Year FAQ

#1. Why is the IRS saying I owe taxes?

The IRS is saying you owe taxes because the amount of tax you paid over the year is less than your year-end total tax liability. There are many reasons this can happen, including your employer withholding less than needed, and you not paying taxes from additional sources of income.

#2. Why do I owe taxes if I claim zero on my W-4?

Even if you claim zero on Form W-4, you may still owe taxes if you’re married and your combined household income places you in a higher tax bracket, or if your withholding didn’t account for additional income. If your spouse makes income and you reach the 25% tax bracket, you’ll have to pay tax.

#3. Why do I owe taxes if I only have one job?

If you only have one job, you may owe taxes due to an incorrect Form W-4, which can result in the employer not withholding enough from your paycheck. It can also happen due to a significant bonus or other compensation that wasn’t accounted for properly.

#4. Can I dispute a tax bill from the IRS?

Yes, you can dispute a tax bill from the IRSif you believe that there has been a mistake. The IRS’s initial decision isn’t final, and you have the right to appeal it. You should provide any documentation that supports your perspective.

#5. How can I adjust my withholding to get a refund next year?

You can adjust your withholding to get a refund next year by submitting a new Form W-4 to your employer. You can fill out the form to indicate that you want a larger amount withheld from each paycheck