Pay As You Go, or You Will Owe

Or…why do I have to pay more money in April when I’ve been paying all year long?

The U.S. income tax system is pay-as-you-go, meaning, the IRS expects you to pay taxes on your income as you earn it throughout the year. In fact, if you owe too much at tax time (relative to your income), they’ll make you pay a penalty for delaying payment. The government isn’t going to wait, Congress wants to spend that tax money now! The general idea is like this:

Except of course, your life and your income don’t always unfold like that. Not every dollar of income is taxed in the same way, sources and amounts of income can vary and change a lot, and changes in your life can have tax implications. So…you might also have something like this:

Or maybe:

undefinedYou had a baby (child tax credit),

undefinedYou paid interest on student loans (tax deduction),

undefinedYou contributed to a Health Savings Account (HSA) on your own- not through a payroll deduction (reduces your taxable income),

…or any number of other things that impact your total taxes owed for the year. So when you (or your tax preparer) do your taxes, you are figuring out any difference between what you owe for the whole year vs what you’ve already paid during the year.

So, what to do if you owe a lot in April and want to keep that from happening again? Either increase your withholding if that’s an option, or pay estimated quarterly taxes. This IRS article (I stole the title!) and this page get into the details. You might want to update your W-4 with your employer to have more money withheld from each paycheck- you’d have less each month, but not face a massive bill at tax time.