There are others, however, that can’t breathe as freely because after filing their taxes this year, they owe the IRS! Are you wondering why you owe? How can you prevent this? Hopefully the tips below will help you!
Why do you owe?
1. Changes in your life/tax return – Changes in your life can have an effect on your tax liability. Did you get married/divorced? Get a raise? Have a baby? Buy a house?
2. Too little withheld from your income – Are your exemptions on your withholding form (W-4) accurate? That determines how much federal taxes are deducted from your pay check.
3. Extra income with no taxes withheld - Do you work full time and have a part time job or consultant job? Did you receive unemployment or take some money from your retirement? Are taxes being deducted properly from your second job?
4. Self-employment taxes - There is a self-employed tax rate that people often forget about. Your income is still subject to federal taxes.
5. Not paying quarterly taxes – Unlike a paycheck where the government automatically withholds taxes, you get to see 100% of your earnings when you work for yourself.. You do, however, still have to pay taxes on that income (as mentioned above). As such, an entrepreneur should be paying quarterly self employment taxes.
How to prevent from owing in the future?
1. Stay in touch with your accountant – Always stay in communication with your accountant/tax preparer so you can understand the tax implications of things that may change in your life.
2. Re-figure your paycheck withholding – Recalculate your exemptions on your W-4 with your employer. Changing this will determine the amount of taxes withheld from your check; which will result in a higher or lower tax refund at the end of the year.
3. Request taxes withheld from other income – If you anticipate getting any extra income as discussed above, be sure to request that federal taxes are withheld.
4. Plan for small business taxes – Be sure to pay quarterly self-employment taxes. This will prevent a huge tax liability at the end of the year.
5. Open home based business – Entrepreneurs have so many tax deductions. If time permits, perhaps look into opening a home based business to leverage the tax advantages AND make a few extra dollars!!
I hope these tips helped you and you can use them to prevent you from owing the IRS in the future!
(Note: these are general tips and not specific to any particular situation. Please consult with your tax accountant to consult with for your personal tax case.)
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