5 mistakes to avoid when you owe federal taxes
Learn about five serious mistakes to avoid when you owe federal taxes, such as not filing a return or choosing the wrong way to pay.
Making a mistake when you owe federal taxes can have serious consequences and penalties.
The deadline for paying tax in 2024 is April 15. However, you may apply for an extension.
Not filing a return or not requesting an extension are two common mistakes.
A financial advisor can help alleviate your tax anxiety and ensure you’re paying the right amount of tax on time.
How much federal tax do I owe?
According to the IRS, Americans failed to pay $688 billion in taxes in 2021, and this figure continues to rise.
Federal income tax calculations are based on tax rates ranging from 10% to 37%, although you can claim credits and deductions to lower the taxes you owe and reduce your tax burden.
How you calculate the amount of tax you owe and how you file your return depends on whether you get a W-2 tax form from your employer or you’re an independent contractor who doesn’t have federal tax deducted (also known as 1099 employees and self-employment tax).
How do I pay my federal taxes?
With that in mind, let’s glance at how you pay your federal taxes.
The range of options includes:
Electronic Funds Withdrawal (EFW): This is the standard payment option that comes with guided tax-preparation programs and Free File, allowing you to pay the IRS directly from your bank account.
IRS Direct Pay: Affordable and simple, this free service is available through the IRS Direct Pay website, and it allows you to pay directly from your bank account and cancel or modify a payment before it’s due to process.
Electronic Federal Tax Payment System (EFTPS): Another online payment service offered by the IRS, EFTPS, requires you to register before using it to authorize an ACH transaction from your bank account.
Other options: You can also use a debit card, credit card, check/cashier’s check/money order, mobile, cash, same-day wire transfer, and payment plan (installments) to pay federal taxes owed.
How long do I have to pay my taxes?
You must pay the federal taxes you owe by April 15, which is a Monday in 2024.
April 15 is Tax Day for individual filers, including employees, self-employed people, gig workers, independent contractors, and retirees.
If you request an extension, you’re asking for permission to file your tax return with the IRS at a later date (usually mid-October).
5 mistakes to avoid when you owe federal taxes
Avoid making these key mistakes when you owe federal taxes, as you could face serious consequences that are not limited to high penalties.
1. Not filing a return
It’s a bad idea not to file a return if you can’t afford to pay the taxes you owe. If you don’t file your return on time, the IRS will automatically add a 5% failure to file penalty for every month you owe taxes, up to a 25% maximum. You’ll also need to pay interest on your tax bill. Filing your return on time is an opportunity to give yourself a little more financial security.
2. Not setting up a payment plan
If you can’t afford to pay the federal taxes you owe by Tax Day, find out if you qualify for an installment plan. You might be eligible for an online payment plan if you owe less than $50,000 in income taxes, penalties, and interest. You’ll have up to 72 months to pay your debt in full if you qualify.
3. Not requesting an extension
If you successfully request an extension for filing your tax return, the IRS will give you an additional six months. If you make the request before Tax Day, you won’t need to pay the failure to file penalty. This gives you time to sort out your tax return and make informed decisions. Take note that if you have any outstanding taxes, you’ll still need to pay a failure penalty, which is 0.5% of the balance but can be as high as 25%.
4. Choosing the wrong way to pay
Be wary of choosing the wrong way to pay the federal taxes you owe, especially if this involves taking on more debt because you don’t have enough cash to cover the bill. Rather than making a hasty decision, spend time comparing fees, interest rates, and repayment terms and working out the actual cost. Try to pay in the way that best suits your financial situation.
5. Ignoring the consequences
If you don’t file your return and pay any federal taxes owed, the IRS can do more than simply charge penalties and interest. The IRS can garnish your wages, place a lien against your property, or even cancel your passport. Don’t be tempted to ignore the potential consequences, as paying what you owe can spare you from significant future hassles.
Seek expert financial advice
There’s much to remember when calculating, filing, and paying the federal tax you owe, and making a mistake could cost you much more in the long run.
Let Unbiased match you with an SEC-regulated financial advisor for expert financial advice and to help you learn more about taxes.
Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.