The IRS issued an alert on January 19th, urging taxpayers to adjust their 2023 paycheck withholding to prevent facing penalties and interest. Additionally, the rules for 2022 and beyond will be stricter, with smaller refunds expected and some taxpayers potentially owing money to the government.
Owing a balance at tax time can create a significant financial burden, particularly if the balance is substantial or if the taxpayer is experiencing financial difficulties.
The IRS has an online tool that wage-earning taxpayers can use to determine if they have too much or too little tax withheld from their paychecks.
The Tax Withholding Estimator is a tool that allows taxpayers to determine if they will receive a tax refund or need to make a payment to avoid owing taxes and potentially incurring penalties in the next year.
When too much tax is withheld, taxpayers are essentially providing an interest-free loan to the federal government by waiting for a refund.
If a taxpayer does not have enough taxes withheld from their paychecks throughout the year, they may owe a balance when they file their taxes. The IRS charges interest on any unpaid taxes starting from the original due date of the return, and penalties may be assessed if the taxpayer fails to file their return on time or fails to pay the taxes owed by the deadline.
Owing a balance can also have negative effects on credit scores as it is considered an unpaid debt. This can lead to consequences such as wage garnishments, liens on property and even imprisonment.
Individuals who have multiple sources of income may be required to make quarterly estimated tax payments to the IRS. The Tax Withholding Estimator tool can help them adjust the amount of income tax withheld from their paychecks, avoiding the need for quarterly estimated tax payments.
After determining how much tax should be withheld, taxpayers can submit a new Form W-4 to employers.
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