You May Owe Taxes If You Fall Into One of These 3 Categories

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  • Owing money to the IRS can be stressful, especially if it's a sum so large you can't pay it all at once.
  • There are different reasons you might have a tax liability on your hands, and it's important to figure out why you've landed in that situation.
  • Extra money in 2021 from a side hustle, stimulus payment, or the stock market could lead to you owing taxes.

You may have to write out a check to the IRS after all.

Getting a tax refund is not always a good thing. The reason? It means you overpaid your taxes during the year and gave the government more of your money to hang onto with nothing in return.

That said, most filers would much rather collect a tax refund than land in a position where they owe the IRS money -- especially a large sum. If you're working on your 2021 tax return and see you have an underpayment on your hands, these could be just a few reasons why you owe the IRS.

1. You earned a lot of money from a side hustle in 2021

A lot of people joined the gig economy in 2021. If you took on a side hustle where you were paid an hourly wage and had taxes taken out of your earnings from the start, then you may not have a tax liability on your hands. But if you were paid on a freelance basis and didn't have any taxes taken out of your earnings, then you may now have a tax bill to deal with.

Say you did graphic design work for a company that paid you $9,000. If you paid no tax on that money, there's a good chance you now owe the IRS something, since that's a substantial sum.

2. You made a lot of money in the stock market

The stock market had a strong year in 2021. If you sold some of your stocks at a profit in a regular brokerage account (as opposed to an IRA), that may have resulted in a substantial capital gains tax bill. This especially applies if you sold stocks you owned for a year or less.

3. You received an extra stimulus payment

When the American Rescue Plan was signed into law in March 2021, the IRS was quick to issue stimulus checks to get that aid out to the people who needed it. But in that rush, the agency may have inadvertently sent duplicate payments to some recipients. If an extra payment hit your bank account, don't be surprised if you end up having to pay that money back.

What to do if you owe money you can't pay

You may do your taxes and see you only owe the IRS a small amount of money. But if you're now on the hook for a larger sum, you may not be in a position where you can pay it all at once.

If that's the case, don't panic. Instead, reach out to the IRS and ask to get on an installment plan, which will allow you to pay your tax bill over time. The IRS is generally pretty accommodating when it comes to installment arrangements, and while you will incur interest and penalties on your unpaid tax bill, you won't have to worry about the IRS garnishing your wages to get repaid -- something the agency has the right to do.

What’s more, once you realize why you owe money, you can take steps to avoid a repeat scenario. That could mean being more careful about taking gains in your brokerage account or paying estimated taxes on your side gig earnings. If you owe money because of a stimulus overpayment, that shouldn't be an issue going forward, since so far, there are no plans to send another round of stimulus checks in 2022.

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