January 15, 2025

Why Do I Owe Taxes? 5 Possible Reasons and What To Do About Them

In the best years, tax season leads to a refund that you can put directly into your savings account. But sometimes, your tax return shows a balance due instead.

There's no need to panic. Each year, millions of taxpayers owe the IRS more than they anticipated. In most cases, a surprise tax bill just means the amount withheld from your paychecks didn't quite match your full tax obligation.

Whether it's because of a side gig or a change in the law, understanding the "why" behind your taxes is your first step toward taking care of the situation. Below, we'll help you answer the question "Why do I owe taxes this year?" We'll also cover what to do and how to keep it from happening next year.

Why do I owe taxes this year?

No one wants to be left wondering "Why do I have to pay taxes instead of getting a refund?" after filing a tax return with the IRS. Here’s how to know if you owe taxes and why.

Your tax withholding doesn’t match your situation

The most common culprit is that your tax withholding is off. This happens when the tax withheld by your employer isn't enough to cover your state or federal tax obligation.

Simple mistakes on your W-4 form about filing status, dependents, or extra income from side hustles can lead to tax withholding mistakes. Many don't realize that changes like raises or losing tax credits when your kids turn 17 throws off your tax return.

You earned self-employment income

Self-employment income is another major reason taxpayers end up owing the IRS. Whether you're freelancing full-time or running a passion project, no employer withholds taxes on your behalf. That’s up to you.

If you expect to owe taxes of more than $1,000 on your self-employed income, you need to make quarterly payments to avoid penalties. It's a good idea to set money aside every month or from every invoice to make sure you can cover everything when you file your taxes.

Your life circumstances changed

Life changes also affect your tax situation. Getting married, switching careers, or receiving unemployment benefits all impact what you owe.

Plus, debt changes, like paying off your student loans or mortgage, mean losing those interest deductions, which can actually increase what you owe.

Your income bumped up your tax bracket

Your income level matters, too. A salary increase might push you into a higher tax bracket. This jump can also affect your eligibility for credits like the Earned Income Tax Credit.

You sold investments for a profit

Don't forget about investment gains. Selling stocks, cryptocurrency, ETFs, real estate, and other assets for a profit generally means you owe capital gains tax. The rate depends on how long you held the investment. Assets sold within a year face higher short-term rates, while longer-term holdings qualify for lower ones at 0 to 20%.

What can I do if I owe taxes?

Let's start with the obvious: Always file your tax returns on time to avoid failure-to-file penalties.

Another no-brainer: If you have the money, pay your tax bill right away. Prompt payment really is your best option for avoiding IRS penalties and interest.

If you don't have the funds to pay your tax bill in full, the IRS offers a few different payment plans. For tax bills under $100,000, you can set up a short-term plan and pay within 120 days. If you need more time, long-term monthly payment plans are available for balances under $50,000. Setup fees range from $31 to $130, but these might be waived if your income qualifies.

Apply for a payment plan online or by phone. If you're facing serious financial hardship, like bankruptcy, you can also request that the IRS temporarily delay collection while you get back on your feet.

If your situation is more complex than you can handle, the smartest move is asking for help. A tax professional can review your situation to explain what to do and how to do it. They might find credits or deductions you missed, help you understand payment options, or guide you in adjusting your tax withholding to prevent future surprises.

How can I avoid owing taxes next year?

Asking yourself “Why do I owe so much in taxes?” once is tough enough. Asking it two years in a row isn’t a tradition you want to start.

The best time to prevent owing extra is long before you file your tax return. Here's how to avoid owing taxes you aren’t prepared for next year.

Fix your withholding first

If incorrect withholding led to your tax bill, now's the time to fix it. Submit a new W-4 form to your employer as early in the tax year as possible. Use the IRS withholding calculator to find out the right amount based on your salary, filing status, and other income sources. Consider any tax credits or deductions you might qualify for, like childcare expenses or retirement contributions.

Master self-employment taxes

If you're self-employed, keep detailed records of your income and expenses throughout the year. Calculate earnings quarterly and set aside roughly 25–30% of them for taxes. It helps to set up automatic transfers to make sure you're saving enough to cover your tax bill.

Make sure you understand how to estimate and make quarterly tax payments if you'll owe more than $1,000 from self-employment income, even if it's not your main income source.

Report all your income

Your regular paycheck isn't the only income the IRS cares about. Track earnings from freelance work, investments, rental properties, and pensions, and make sure to report them all when you file your state and federal tax returns.

Adjust for life changes

Major life events can significantly impact your tax situation. Getting married, having children, or taking on freelance work? Update your W-4 right away.

Use a withholding calculator to determine your new tax liability and adjust accordingly. Don't wait until tax season to find out how these changes affect what you owe.

Stay current on tax laws

Tax codes evolve. Keep an eye on tax reform updates that might affect your situation. Review your withholding whenever major tax laws change. If you're unsure how new regulations might impact you, consider consulting a tax professional for guidance.

Stay financially confident with credit monitoring

Owing taxes may catch you off guard, but your financial health never should. With EarnIn's free Credit Monitoring, you can track your credit score, monitor account activity, and receive alerts to help protect your financial well-being. Stay informed about your credit score — and what you owe — so you can confidently move forward with fewer surprises.

Take charge of your credit and download EarnIn today.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.