Why do people owe the IRS? Under Withholding & Retirement Accounts

If your employer is withholding money for income taxes from your check how do you end up owing the IRS.

Your employer withholds based on the information you provide on your W-4. I have had clients who have claimed up to 99 exemptions on their W-4s. This means that not enough money is being withheld and so you owe the IRS.

Another big problem area is retirement accounts. Many people don’t understand that tax deferred accounts are taxed as regular income when the money is distributed. On top of that up to 85% of your Social Security benefit can be taxable depending on your other income.

Why do people owe the IRS? Self Employed

I am an Enrolled Agent and have represented hundreds of people with Power of Attorney before the IRS. This had led me to think about why people owe. Today we’ll talk about the Self Employed, Self Employment Tax and Estimated Taxes

There are two types of self employed: Those that know they have a business and those who think they have a job but get paid with a 1099.

When you are employed (W2) your employer withholds money for income tax (W4) and they withhold 1/2 of your Social Security & Medicare. The contribute the other 1/2.

When you are Self Employed you must make your own Income Tax payments and since you are the employer and the employee and must pay both 1/2s  of your Social Security and Medicare (Known as Self Employment Tax this comes to 15.3% of your net income).

You make all of these payments as Estimated Taxes and the IRS expect them 4 times per year.

So one way people end up owing money is that they don’t even know that there are such things as Self Employment Tax or Estimated Taxes