Why do I owe so much in taxes?

February 19, 2015 9:45 AM

I made less than 30K last year and owe almost 2K in taxes (federal and state). What gives? I'm guessing this is a problem with withholding from multiple jobs but I don't understand what exactly happened or how to fix it. Please use small words.

Job 1: Made $5620, $20 withheld (seems wrong)
Job 2: Made $17800, $460 withheld
Job 3: Made $4990, $325 withheld

All are W2 jobs. How can I avoid this next year? And is there any way to reduce the amount I need to pay this year?

posted by chaiminda to Work & Money (28 answers total)

When you submitted your W4, how many allowances are you taking? If you set up your withholding right, you shouldn't owe (or be refunded) too much at the end of the year.
posted by ThePinkSuperhero at 9:47 AM on February 19, 2015

The amount you need to pay is set by how much taxable income you have. By adjusting your W4 form withholdings, you can adjust how much is prepayed from each paycheck vs. how much you pay at the end of the year.
posted by muddgirl at 9:50 AM on February 19, 2015

You're not withholding enough. You can usually increase how much you're withholding talk to your payroll department(s) or managers about updating your W4. But...

You pay the same amount of taxes no matter how much you withhold. The best possible thing you can do is withhold less and save that money in an interest-bearing account until tax time. Otherwise you're just giving a free loan to the government and letting them collect interest on it.

I realize that is often more difficult than it sounds. It makes perfect sense on paper, but in reality it's often hard to put that money away every week. So if there's a way you can save money via payroll deductions, do that. That way you're not seeing the money every week but it's still yours.

When tax time comes and you write a check to the IRS, be glad of the interest you collected on that money through the year.

I am not an accountant but this is the way I understand how things work. You may want to talk to an accountant as well because there are strategies one can use in order to reduce what you do pay in taxes.
posted by bondcliff at 9:51 AM on February 19, 2015 [7 favorites]

if you're married, try running the numbers jointly and separately and see which one is better.
posted by katieanne at 9:51 AM on February 19, 2015 [1 favorite]

And is there any way to reduce the amount I need to pay this year?

No, unless there are deductions you didn't take when you filed (e.g., forgot to list a child, had thousands in medical expenses that you had to pay out of pocket, many other things).

You can, however, set up a payment plan with the IRS. You will pay interest on this though, and do not fall behind or your payment plan may be revoked and you will pay penalties. States do this differently so you'll have to check their website. You're better paying it off all at once and on time if you are able to. If you do not pay enough, they will garnish (take( your refund next year.
posted by desjardins at 9:55 AM on February 19, 2015

Yes, it seems like you have an issue with your withholding. Like TPS said, you might have had too many allowances, so they didn't take enough out of your paycheck. It's also possible that something weird happened and your jobs where you weren't making very much money took out too little because they assumed you'd be getting the earned income credit.

You were only taxed 3% of your salary this year - this is really low, so it stinks but you probably are just going to have to pay up. I don't know enough about your situation but I'd guess you'd owe 15-25% of your income on taxes. If you don't have the cash in hand, you can set up a payment plan + interest with the IRS.
posted by fermezporte at 9:55 AM on February 19, 2015

Best answer: This is a problem with having multiple jobs; even if you're set at 0/0, sometimes they don't take out enough. Each job assumes that you're only working that job when they take out taxes (which makes sense, right? On paper, each job only accounts for the income you're generating there). You can adjust for this with the worksheet you fill out with your W4, but again, you can only adjust so much with allowances (i.e. if you're at 0/0 and they're still not taking enough).

I would adjust down to 0 and 0 if you're not already at 0 allowances at each job. Additionally, you can have them deduct an additional amount from your check (it's line 6 on the bottom part of the form). So sit down with a paycheck calculator (http://www.paycheckcity.com/calculator/salary/), figure out how much is going to be deducted for each job for each month if you set your allowances to 0, add that up, multiply it by 12, subtract that from what you owed this year, then take the remainder and divide by 12 or 24 (depending on whether you're paid once a month or twice a month, or 52 if it's once a week) and figure out which job you want to have take out extra.

I can appreciate the point of "better to have the money make interest and then write the IRS a check", but for savings at this amount, interest rates are super low right now, and I know that at least for me, I'm a lot better off making sure the correct amount of money is being taken out every month vs. trying to save against a tax bill a year from now.
posted by joycehealy at 9:57 AM on February 19, 2015 [21 favorites]

If these are all three part-time jobs held through-out the year, I will suggest that they are probably acting like this is your entire income for the year and not withholding enough. Because if you only held ONE of those three jobs, no, you probably wouldn't owe significant taxes.

It might be worth it to go have your taxes done professionally. When I was going through a divorce, having my taxes done professionally one year was worth like an extra thousand dollars to me in refund money (I don't recall why). If you are overlooking important deductions, you are not likely to figure that out on your own.
posted by Michele in California at 10:00 AM on February 19, 2015 [2 favorites]

Yeah, why aren't you filing jointly?

You seem to be saying you're paying 2805 in taxes for 28410 in income. That's about 10%. I have no clue how much you're paying on your state taxes, but that does seem highish. Who/how did you do your taxes? Seems worth double checking.
posted by Trifling at 10:01 AM on February 19, 2015

is there any way to reduce the amount I need to pay this year?

Not this year

In the future:
Make sure you're not counting for too many allowances (might also be called exemptions or exempts) - as a single childless person, my federal allowance is 1 and my state exempt is 0.

If you must make more allowances, you can have them withhold more on your paychecks. Talk to the payroll departments about this.

You could also deposit $170/month into a savings account, if you can't or aren't willing to change any of the allowances or withholding.
posted by royalsong at 10:02 AM on February 19, 2015

There are a few W-4 calculators that will help you determine how to set-up your withholding across multiple jobs so that you won't be surprised next year.

From ADP

Or Paycheckcity
posted by saffry at 10:06 AM on February 19, 2015 [3 favorites]

Although I am not a tax expert, I don't think this can be due to the employer making assumptions that the amount paid is the employee's only income for the year. In my experience, W2 jobs calculate the amount withheld on a given paycheck based on an annualized projection. In other words, if an employee is getting a base pay of $1,000 per week, the amount withheld will be calculated according to the taxes owed by someone with a $52,000 annual income. If that same employee works a ton of overtime one week and earns a paycheck with a base pay of $1,700, the percent withheld will be higher than the usual amount. This is because the annual income projected on that particular paycheck ($88,400) is in a higher tax bracket.

It seems to me that there must be something amiss with the withholding allowances.
posted by slkinsey at 10:13 AM on February 19, 2015

Withholding is calculated on a per-paycheck, per-job basis. Each paycheck is treated as though that represents your income for the year. So if you're paid weekly at one job, and the paycheck is $100, the payroll program assumes your gross income for the year is $5200, and withholds accordingly (i.e., little to none because of the standard deduction).

You need to use the multiple jobs worksheet on the W-4, and check your withholdings throughout the year/make adjustments as needed.

For your 2014 liability, you may be able to make an IRA contribution (before April 15) that reduces your taxable income. This results in a larger cash outlay, but at least you're paying yourself rather than the IRS.

Whatever you do - FILE ON TIME, even if you can't pay. Pay as much as you can by April 15. You can request a 120 day payment extension. If you don't get the extension or can't pay within that time, you can set up an installment agreement. You don't specify your state, so I can't provide links for that, but most states have similar options. FILE ON TIME.
posted by melissasaurus at 10:15 AM on February 19, 2015 [2 favorites]

How can I avoid this next year?
Are you going to make close to the same amount and have the same deductions? If yes, then you need to make sure that of the $27,810 that you make, at least $2805 is taken out in taxes through the year. That is almost exactly 10 percent. If you plan to make more, I'd up it to 12-15 percent as a goal. Check every single paycheck to see how much was withheld and how far away from your goal you are. Hopefully you get a Year-to-Date total of everything on your paystubs. Either put the difference in savings yourself or increase the flat amount taken out of each paycheck if you are are not reaching the goal. Interest rates are ridiculously low on plain old savings accounts, so upping what you pay in is my vote.
posted by soelo at 10:39 AM on February 19, 2015

If you make a 2014 IRA contribution you may get a significant reduction in taxes, not just because of the reduced income but also due to a tax credit aimed at people with low incomes. See IRS Form 8880 for a potential break on your tax owed of up to 50% of your IRA contribution.
posted by Midnight Skulker at 10:41 AM on February 19, 2015 [3 favorites]

Best answer: Although I am not a tax expert, I don't think this can be due to the employer making assumptions that the amount paid is the employee's only income for the year.

Yes, it can be - when you have more than one employer. For a simpler example: if you worked 100 jobs but only made $1000 from each of them, each job would withhold $0 because if you only made $1000 for the year you wouldn't pay any tax. Obviously, when you added them all together in your tax return, you would now owe money because you do have to pay tax when you make $100,000.
posted by the agents of KAOS at 11:11 AM on February 19, 2015 [8 favorites]

Also for planning purposes you should also look into underpayment penalties. (You may even be nailed this year). Here are a couple of IRS links: Topic 306 - Penalty for Underpayment of Estimated Tax and Underpayment Penalty for 2014
posted by achrise at 11:21 AM on February 19, 2015

If you calculate that you have not had enough tax withheld, you can file form 1040-ES along with a check. As others have said, you get no significant interest on a savings account, so you might as well give it to the guvmint early. Any time you might owe more than $1000, you should do this or you may (will) be penalized.

I had this happen to me once, but it turned out to be my employer's error, so I escaped without penalty.
posted by H21 at 11:48 AM on February 19, 2015 [1 favorite]

Any kids? If so, you may qualify for the EITC, a credit that could have been missed. Check it out here.
posted by susiswimmer at 11:56 AM on February 19, 2015 [1 favorite]

For a simpler example: if you worked 100 jobs but only made $1000 from each of them, each job would withhold $0 because if you only made $1000 for the year you wouldn't pay any tax.

My understanding is that, if each of those jobs paid $1,000 in a single paycheck, there would be withholding at the $52,000 tax bracket rate. This would, of course, be lower than the rate should be for an actual income of $100,000, but I don't think it would be $0. That said, if the size of an individual paycheck is so small that the annualized income projection would result in no taxes owed, then you are correct that there would be no withholding. Thus, with respect to the OP, a relevant question would be the amount of time it took to earn the listed incomes. Multiple job withholding becomes very tricky if they result in average paycheck sizes that don't correlate well with the worker's combined annual income.
posted by slkinsey at 12:05 PM on February 19, 2015

My understanding is that, if each of those jobs paid $1,000 in a single paycheck, there would be withholding at the $52,000 tax bracket rate.

Well, I think the problem is that it is more like if you made $19.23 each week of the year from 100 different employers. Over the year, you make $1000 from each of them. None of them withholds any taxes, but you do owe taxes on all of it.

I went through something similar when I had a job and was getting alimony. No taxes were withheld from the alimony itself and my employer had no idea they needed to account for that additional income, so they didn't. I had been a homemaker for a long time and was not savvy about these things. I was quite shocked when I ran into tax problems. Now that I have alimony and not much else, I owe $zero in taxes at the end of the year because my income is too low. But when it was on top of a regular paycheck, it absolutely was something I owed taxes on. Should I find myself again making more than X amount of money, I will again have to account for the fact that no taxes get withheld from my alimony throughout the year, but I will owe taxes on it come tax time.
posted by Michele in California at 12:21 PM on February 19, 2015

You seem to be saying you're paying 2805 in taxes for 28410 in income. That's about 10%. I have no clue how much you're paying on your state taxes, but that does seem highish.

$28,410 minus $10,150 for personal exemption and standard deduction leaves a taxable income of $19,850. From the tax tables the tax is $2288. This assumes a single person, no other income and no 401(k) or IRA deductions. The OP's tax calculation seems to be high by about $500.
posted by JackFlash at 12:27 PM on February 19, 2015

Oh, I see that you are in Massachusetts so you are also paying about 5.1% state tax after exemptions and deductions.
posted by JackFlash at 12:53 PM on February 19, 2015

If you and/or your husband work multiple part-time jobs and thus not enough is taken out even with zero exemptions on your W4 form, you can go ahead and ask them to take more out of each paycheck for next year. When my spouse was working a job where he was payed with scholarship money (taxable, but no withholdings), I started to do that - following a guide like this one.

If you have really uneven income, it's going to be hard to figure out your total tax burden until the end of the year, no matter what. But remember that you don't have to have the exact right percentage taken out of each paycheck, as long as the total is the correct amount.
posted by muddgirl at 1:32 PM on February 19, 2015

(...apologies for just assuming you have a husband based on your profile!)
posted by muddgirl at 1:43 PM on February 19, 2015

You can reduce the amount of taxes you are paying this year by funding an IRA for 2014. You have until April 15th to fund it.
posted by GregorWill at 8:49 AM on February 20, 2015 [2 favorites]

The answers from joycehealy, the agents of KAOS, et al are correct as to how this happened -- each job assumes they're the only income. This gets people who freelance on the side because their day job doesn't factor that into with withholding just like it got you for working multiple W4s. One other thing to mention is the IRS has a withholding calculator that you can run whenever you'd like (I do it quarterly) to avoid surprise underpayment (and overpayment, if the idea of giving the government an interest free loan all year long bothers you).

You can throw money into an IRA if you've got it, but I think that they're a deduction, not a credit.
posted by Brian Puccio at 3:28 PM on February 21, 2015 [1 favorite]

You can throw money into an IRA if you've got it, but I think that they're a deduction, not a credit.

This is true. To elaborate, whatever you put into the IRA reduces your income subject to tax, so it reduces your tax by whatever your tax rate is.

However, you don't have access to this money without paying a penalty until age 59 1/2. And, you still have to pay taxes on it when you do take it out (ideally when you are retired and making less).

IRAs can be a really good deal if you can afford to lock this money up for a long time.
posted by H21 at 8:54 AM on February 24, 2015