I Owed the IRS More Than $10,000 This Tax Season. Here's How I Handled It

Many people who file a tax return wind up getting a refund from the IRS within a few weeks of submitting it. So far this year, the average tax refund issued by the IRS amounts to $2,864.

But while it's easy to assume that you'll end up on the receiving end of a tax refund, things don't always work out that way. Take it from me.

As someone who's self-employed, I'm used to not getting money back from the IRS in April. Quite the contrary -- I almost always end up owing the IRS money when I file my taxes, and sometimes, a lot of it.

Such was the case this year when my accountant and I ran the final numbers and realized that I'd underpaid my 2023 taxes by over $10,000. Ouch. But while that was certainly a painful sum of money to part with, it didn't upend my finances because I was prepared for it.

Why it's so hard for me to get my tax payments just right

Because I'm self-employed, I don't have taxes withheld from my wages as I earn money during the year. If a client owes me $500 for a project I've completed, I'm getting a $500 check, and it's on me to make sure I'm setting aside a portion for the IRS.

Figuring out that portion, however, isn't so easy. Different variables could dictate what your total tax obligation looks like for a given year.

In my case, I worked with an accountant to make estimated quarterly tax payments in 2023 based on my anticipated earnings. But while my job-related estimates were fairly accurate, I wound up earning more money in savings account interest and dividends from my stock portfolio than I'd expected. That, combined with the fact that I had fewer business expenses to deduct in 2023 than in previous years, led to a major underpayment on my part.

When you anticipate owing money from the start

The bad news in all of this is that I recently had to send more than $10,000 of my hard-earned money to the IRS instead of getting to keep it for myself. The good news is that I had the money on hand to make that payment. In fact, I always keep extra cash in the bank until my tax bill is reconciled for the year. So I didn't have to charge my tax bill on a credit card and pay it off over time, and I also didn't have to approach the IRS about setting up a payment plan.

To be clear, there's nothing wrong with paying off your taxes over time via an installment plan, and the IRS is typically pretty flexible when it comes to setting up these arrangements. But under an IRS installment plan, you continue to accrue interest on your tax bill, which is something I'd prefer to avoid.

All told, I'm not shocked that I owed the IRS money for 2023, but I was somewhat surprised at how much money I owed. If you're self-employed, learn a lesson from my experience and make it a point to set aside extra money just in case your IRS bill comes in higher than expected.

Also, don't assume that working with an accountant will ensure that your four estimated quarterly tax payments will cover your IRS obligation in full for the year. Accountants can't always get those numbers down pat.

However, the more accurate those estimates are, the less likely you are to be unpleasantly surprised come tax season. So think about your total income picture, including money you earn from savings or stock investments, to come up with those numbers.

You could also err on the side of padding your estimated quarterly payments if you're worried about owing the IRS money during tax season. That's something I've thought about doing, since I pretty much always end up owing some money. However, the way I see it, if I pay the IRS extra during the year, the IRS gets to earn interest on my money. I'd rather be the one to earn interest on my money, which is why I prefer to keep the cash on hand and simply send it over to the IRS on or around April 15 each year.