You may owe federal tax because too little was withheld from your paychecks, you had extra income, or you lost a tax credit.
Common reasons
- Too little tax withheld (check your W-4).
- Side income or gig work with no withholding.
- Investment income or capital gains.
- Unemployment benefits.
- Lost credits or changes in filing status.
- Two jobs or a working spouse.
What to do
File on time and pay by April 15. If you can’t, set up an IRS payment plan.
Next year
Use the IRS Tax Withholding Estimator.
Penalty
Underpayment penalty may apply.
Withholding too low
Employers withhold tax based on your Form W-4. If you claimed too little withholding, you may owe at filing. This is common for people with multiple jobs, a working spouse, or large side income.
Self employment and side income
Freelance, gig, and rental income are not subject to withholding. You owe income tax plus self employment tax of 15.3% (Social Security and Medicare) on net earnings. Quarterly estimated payments are due April 15, June 15, September 15 and January 15.
Other reasons
- Loss of a dependent or credit.
- Change in filing status.
- Unemployment benefits, which are taxable (with optional withholding).
- Retirement account distributions, and early withdrawals with a 10% penalty.
- Investment gains, dividends and interest.
- Stimulus or credit repayment.
- Lower refundable credits than the previous year.
- Pandemic era provisions ending.
- Bonuses and stock compensation withheld at flat 22%.
Check your return
Review the reasons on the IRS Form 1040. Compare to last year.
Penalty
You may owe an underpayment penalty if you paid less than 90% of the current year’s tax or 100% of the prior year’s tax (110% if adjusted gross income exceeds 150,000 dollars). Use Form 2210.
What to do now
File on time even if you can’t pay. Pay what you can, and set up an IRS payment plan online. Penalties for late payment are 0.5% per month and interest applies.
Next year
Use the IRS Tax Withholding Estimator, update your W-4, and make estimated payments if needed.
Common tax reasons
Owing at filing time usually means too little tax was withheld during the year. Common causes are a new job with a second income, changing the W-4, side income or gig work without estimated payments, large investment gains, unemployment benefits, retirement withdrawals and loss of credits. Self employed people owe both income tax and 15.3 percent self employment tax on net earnings.
Penalties and solutions
The IRS charges a failure to pay penalty of 0.5 percent per month of the unpaid tax plus interest, and a failure to file penalty of 5 percent per month up to 25 percent, so file on time even if you cannot pay. The IRS offers installment plans, and the Tax Withholding Estimator on irs.gov helps adjust a W-4 for next year. Quarterly estimated payments avoid underpayment penalties.
Based on data from the Internal Revenue Service
