Two reasons why people owe taxes. Underwitholding, self-employment

If you owe more than you thought at tax time, then you may be underwitholding or did not plan for for self-employment taxes.

1) Underwithholding. You have W-2 income and for whatever reason, not enough is withheld for federal income tax. Look at your paystub or W-2. Divide Box 2 (income tax withheld) by Box 1 (wages paid.) If the percentage is less then 10%, you are probaby underwitholding. This increases your chances of owing at tax time.

To change withholding, contact your employer and fill out Form W-4, listing incomes, dependents, etc., and will calculate what should be withheld. The form goes to your employers, not to the IRS. FYI: It is a complicated form

Be careful if you have multiple jobs and individually they don’t pay much but in aggregate do. For example, you have 4 jobs that paid you $5,000 each last year. The W-2s are probably assuming you are very low income and aren’t withholding much at all. Yet your total income puts you in a 12% tax bracket. You may owe.

2) Self-employment income. You are paid for a service. Income taxes are not taken out. You will receive a 1099-NEC listing the income. Not only are you liable for income tax, you also have to pay Medicare and Social Security, which is 15.3%.

Let’s say you have $30,000 in self-employment income for 2020. You will owe $3402 in income tax and $4590 in self-employment tax. The standard deduction and various tax breaks for self-employed will probably reduce this substantially. However, it often is shocking to many that they owe taxes on this income.

Also, self-employed income is entered on Schedule C of the tax return, which can add $100-200 to the cost of a return.