What Is Withholding Tax and How Does It Work?

You must first understand how income tax works to comprehend why you owe taxes this year. Every year, the majority of working Americans pay taxes to both the federal and state governments on their incomes. From a federal standpoint, withholding tax is the amount deducted from your paycheck and paid to the government directly before you see it. In most situations, you'll also have to pay a withholding tax on your state taxes, though there are a few states that don't.

Your employer will calculate the amount of withholding based on the amount of money you make and other relevant information you supply on your Form W-4. If you don't complete this form correctly, your paycheck could be deducted too little each pay period, resulting in underpayment of taxes.

Why Do I Owe Taxes This Year In 2022?

It's critical to figure out why you owe taxes so you can prevent it from happening again. While each person's situation is different, some general explanations can shed light on the issue. Here are five reasons why you can owe money in taxes.

Taking Too Little Money From Your Paycheck

The amount deducted from your paycheck for the year is an estimate of how much you'll owe when it's time to submit your taxes. You'll get a tax refund if you overpay. However, if you don't pay enough during the year, you'll get a bill when tax season rolls around.

Inability to File

Failure to file taxes on time is another concern that might result in unpaid taxes. The annual due date for federal taxes is often April 15th. State tax deadlines may differ. If you file late and don't apply for an extension promptly, you may be charged late penalties and interest, which may increase your tax bill. If you're wondering why you owe taxes this year, it may be because you filed your tax return late.

Tax Code Modifications

In recent years, there have been various changes to the tax code that could have a substantial impact on how much you pay in taxes. Even if you normally expect a refund, the new tax laws may prevent you from receiving one. The IRS may have impacted you and placed you in a new tax bracket when it revised its tax brackets.

Higher-Than-Usual Earnings

Earning more money implies paying more taxes. Whether you got a raise in your income or worked a lot of overtime while being paid hourly, you could have ended up in a higher tax rate.

Deductions Have Changed

If you didn't qualify for the deductions and credits you've come to anticipate, you might owe taxes this year. Annual limits apply to the earned income tax credit, for example. If you earned more in the prior tax year, you may no longer be eligible. Many parents, likewise, take advantage of the child tax credit, which can drastically lower the amount of taxes owed. This credit has income limits, or your child may have reached the age of ineligibility.

Why Do I Owe Taxes in 2021? What Happens If I Don’t Pay Them?

Unfortunately, avoiding paying your taxes will not eliminate your debt. If you don't file for an extension, you'll owe back taxes if you don't pay your taxes by the deadline. Whether it's on purpose or not, make paying your back taxes a top priority as soon as you know you owe them.

You should receive a notice from the IRS stating how much you owe. If your situation is intricate, a tax specialist or financial advisor can assist you in understanding your options. The worst thing you can do is to do nothing. Take action so you can come up with a solution and put your tax bill behind you for good.

What Options Do I Have If I Owe Taxes?

You may ask why I owe so much in taxes and worry about paying them, especially if you feel like you are struggling financially. If you are unable to pay your tax payment in full when it is due, you have a range of choices to help you avoid major consequences. Some require you to negotiate payments directly with the IRS, while others need you to find alternative methods of paying your taxes.

Consider the following payment options:

• If you can pay your taxes in full within 120 days, you can apply for a full-payment agreement.
• Enroll in an IRS payment plan.
• Make a reasonable compromise offer.
• To make a tax payment, consider taking out a loan or other form of finance.

Each of these possibilities has its own set of eligibility restrictions and implications. This is especially true if you plan to pay your tax obligation with a personal loan, a home equity loan, or another sort of financing. If you are questioning why I have to pay taxes this year it may be worth talking with a professional accounting and tax service.

Recognize Your Tax Situation

If you are asking yourself “Why do I owe taxes this year?”, you need to first understand your tax situation. Even if you owe taxes this year, take advantage of the opportunity to gain a better understanding of your finances in the future. Keep note of how much money you make, how you make it, and how your life evolves over time. It's also a good idea to keep up with tax-related news so you're aware of any major changes that may affect you. Of course, if you have any questions regarding how much you owe or your payment alternatives, see a specialist. It's the most effective strategy to protect yourself while also pleasing the IRS.

Final Thoughts

If any of the information provided above made you feel confused, don’t stress because you are not alone. There are many other businesses that have faced similar problems in the past. However, with time, they have fared well with just a little help.

If you are struggling or just don't have the time to keep up with it, it may be time to have Hall Accounting take over and invest with accurate accounting records and financial reports. The Hall Accounting team will manage your records from start to finish and make sure all adjustments are timely recorded. This option is also feasible for small businesses because it is cheap and hassle-free, at a fixed monthly rate. If you are interested, please feel free to email us at proposals@hallacctco.com and we will get you a free quote!

FUTURE IMPORTANT DEADLINES

1/24/22
IRS began accepting and processing 2021 tax returns

3/15/22
Deadline for partnerships and S-Corp returns for 2021

4/18/22
Deadline to file individual tax returns for 2021
First-quarter estimated tax payments due for 2022
Deadline to contribute to HSA for 2021
Deadline to contribute to IRA for 2021