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Internal Revenue Service: The Consequences of Overpaying Tax

Internal Revenue Service: The Consequences of Overpaying Tax
In this 2013 file photo, you can see the outside of the Internal Revenue Service (IRS) building in Washington. The IRS is a favorite target for criticism in Washington, and it may finally get the money it has been asking Congress for. (Photo: Susan Walsh)

There is a lot for new independent contractors and freelancers to understand when it comes time to file their taxes. One of the most perplexing issues for them is how to cope with projected quarterly taxes. This article shows the consequences of overpaying the Internal Revenue Service.

 

The Consequences of Overpaying the Internal Revenue Service

In this 2013 file photo, you can see the outside of the Internal Revenue Service (IRS) building in Washington. The IRS is a favorite target for criticism in Washington, and it may finally get the money it has been asking Congress for. (Photo: Susan Walsh)

Can you get in trouble if you pay more taxes than you have to?

No, there are no penalties if you pay more tax than you owe. Don’t worry if you paid too much. You won’t owe the IRS anything else. You’ll get a tax refund for the amount you paid too much.

This is true if you paid too much in estimated taxes every three months. It’s also true if you had too much money taken out of a W-2 paycheck.

One bad thing about overpaying is that the internal revenue service gets to keep your money for most of the year. You are, in effect, giving it a small loan.

So, when will you see consequences?

Paying too much is fine, but not paying enough is a different story. If you do that, you might have to pay steep fines and interest on the money you owe.

Will the IRS let you know if you’ve paid too much?

No, the internal revenue service won’t let you know if you paid too much in estimated taxes or had too much taken out of your paycheck. When you fill out your 1040 tax return, you’ll usually figure this out on your own. When that happens, you can ask for your extra money back. (If you want to read about that right away, go to the section on getting back the money you were overpaid.)

If you don’t claim certain credits, you might be told.

If you overpay, you won’t get a notice, but the internal revenue service might let you know if you missed out on a tax credit that could have saved you money.

Some tax credits are checked for automatically by the internal revenue service computers. If you are eligible but haven’t claimed your benefits yet, they will send you a notice. This notice tells you the amount of your new, smaller bill or refund. (In some situations, the internal revenue service may ask you for more information (or proof) before it makes the change.)

Now, let’s look at some of the ways you might pay too much and how to avoid them.

What it means for your estimated taxes if you pay too much

In one situation, it would be easy to pay too much in taxes. As more and more people work on their own or in the “gig economy,” this is becoming a problem for more and more taxpayers.

Estimated taxes are also called “quarterly taxes” because they are paid four times a year.

Who has to pay estimated taxes every three months?
If you don’t have taxes taken out of your pay, and you expect to owe $1,000 or more, you should pay your taxes every three months.

This is true for any money you make outside of a regular job that gives you a W-2. Here are some examples of who it is for:

  1. Freelancers
  2. Uber drivers
  3. hosts of Airbnb
  4. Authors
  5. Pet sitters
  6. Small business owners

 

With one exception, you will be charged an underpayment penalty if you are supposed to make these payments but don’t.

The benefits and drawbacks of paying more in taxes

You might be thinking, “How can paying the internal revenue service more money than necessary have a positive side?”

 

Pro: Spending more helps lessen the stress of April.
You won’t have to worry about a hefty tax burden in April if you overpay now. And you’ll get a refund.

Self-employed individuals who make quarterly payments can reduce stress by contributing a small amount of extra cash to each installment. It can be alluring if you have the money to buy it.

 

Cons: Further payments might not be feasible.
A greater tax bill today equals a lower tax bill afterwards. Many tax payers simply cannot afford to wait months to receive their money back.

It’s not ideal to overspend your taxes in the first quarter if you pay anticipated taxes because you’ll have to wait until the following April to get your money back.

 

Read More: 

2023 Tax Season Guide: How to Get Better Tax Refund This Year

IRS: Taxpayers won’t Need to Report Middle-Class Tax Refund as Income

Tax Filing for Parents and Caregivers: Instructions for 2023

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