February 17, 2014

I finally got my taxes settled this weekend and for the first time in my life I owe the IRS money. After some back and forth, and crunching the numbers, I owe roughly $300. Earlier iterations proved to be much higher, but were due to human error (note: triple check your taxes!)

I’ve always been one to gloat over tax refunds. That has been extra money towards my student loans, partial vacation funds, and saving cushions.  I was making such a low income before I got my current job (16k/yr), but doubled that this year by finally getting a full-time job. I hustled all through out this year and made close to $5k in side hustle income.

In the past 2 years I’ve been hustling, I guess the low-income and the untaxed income just evened out. This year I continued and didn’t give a thought to paying taxes on my independent contractor income.

I know, I know. Total PF fail.

I’ve really learned a lesson here. Although $300 doesn’t seem like a lot of money, it felt like a huge burden to me. It’s almost my half of the rent. It’s practically what I pay in interest per month on my graduate loan. This $300 sparked so many conversations this weekend. Because I have depleted my savings and choose to throw almost all extra income toward debt, I have very little fluid cash to work with. This means I will inevitably have to lower my student loan payments a bit, which really sucks. But here are the steps I’m taking to get through it.

#1: Start a Tax Savings Account

After I realized I was going to owe, I immediately started a tax savings account. The great thing about Capital One 360 (affiliate link) is that you can have sub-savings account. When I got paid on Friday, I transferred over several hundred dollars to my new account to ensure that I had funds available to pay my taxes. Going forward, I will put 10% of all my 1099 income in my new tax savings account, to prevent this from happening again!

#2: Don’t Panic

I’m not going to lie, I panicked a bit when I found out I was going to owe. Sadly, I didn’t even think that it was a possibility. I have been so focused on paying off debt, I hardly thought about my taxes. My empirical evidence gave me no reason to think I would owe. But the good news is I made more side hustle income this year! The bad news is I need to pay taxes on that biz! All this to say, panicking doesn’t help or change the situation.

#3 Don’t Get Discouraged

The only certainties in life are death and taxes right? Don’t get discouraged. Unfortunately taxes are a part of life.  You are a not alone. You are not a loan. This will be just one more thing to get over.

I will be paying my dutiful part to the IRS in the next few weeks. I will look forward to the side hustle income actually hitting my accounts in late February, early March. Although I’ve felt a bit down about this unexpected money, it just reminds me that the debt repayment journey is a process. It’s ups and downs, plateaus and setbacks; the main thing is that you got to keep going!

Have you done your taxes this year? Are you expecting a refund or do you owe?



Melanie is a freelance writer currently living in Portland, Oregon. She is passionate about education, financial literacy, and empowering people to take control of their finances. She writes about breaking up with debt, freelancing, and side hustle adventures at DearDebt.com.

Currently she puts more than 50% of her income towards debt, while living a frugal, fun life. In addition to her love of personal finance, art and music, she is also a karaoke master. Follow the adventure @DearDebtBlog.

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49 responses to “Oh No! I Owe (Taxes)”

  1. Brandy says:

    We got a nice chunk of change back from federal and state. However, we owe about $500 in local taxes (neither one of our employers will let us deduct this from our paychecks, trust me we’ve tried). Nice job on setting up a plan and moving forward. It’s the best thing you can do!

  2. I’m so sorry you have to deal with this!

    This is just one of the many many reasons to have an emergency fund. In the long term it keeps you from going back into debt when things like this happen. I also blame the Internet/blogs a bit that write “hustle hustle hustle” but don’t ever mention taxes much. Definitely something you have to pay attention to if you’re going to work for yourself!
    Leslie Beslie recently posted…Weekly Updates: Half Marathon Training at the GymMy Profile

    • deardebt says:

      Yeah, my EF has enough to take care of it but I’d rather not touch it. So I just took it out of my recent check, or money that would go toward my student loan. Oh well. At least I’m not getting into further debt for it. With the savings account and diligently putting 10% of each paycheck, I should avoid being caught off guard. The only person I really see mention taxes is Michelle at Sense of Cents. Freelance income is tricky and you can’t forget about the taxes!

  3. Petrish says:

    Sorry about your taxes. I have to tackle mine soon and I plan on using all of it to kill off some of my debt so I total get what your feeling. Being in the military I cannot afford to do a side hustle right now, but I will definitely take notes from you for the future. Hope you feel better….real soon.

    • deardebt says:

      I’m feeling pretty good now that I have a plan going forward. This hurts just enough to teach me a lesson, but nothing I can’t overcome. I hate taxes any which way you put it though.

  4. Hate it when that happens! We got ours done last week, and had to pay into state, but got money back on the federal, so it all came out in the wash, so to speak. Still, though, I hate owing money, so we will probably decrease our state withholding amount this year.

  5. I dread getting mine done because I have a feeling I’m going to owe…and not hundreds but maybe a couple thousand. Yup, my income increased dramatically last year and with my estimated taxes that my accountant set up, I might have been paying too low all year and I pray I don’t get penalized. That AND I was really frugal so I cut WAY back on expenses. It’s like a catch 22.
    Tonya@Budget and the Beach recently posted…The Real LA WomanMy Profile

    • Fortunately I DID save money for it, and I plan on putting whatever I owe on cc for rewards points. So hopefully that will take some sting out.
      Tonya@Budget and the Beach recently posted…The Real LA WomanMy Profile

      • deardebt says:

        Good thing your income increased so much AND you saved for it. It will still be painful for sure, but being prepared helps you sleep better at night. I will feel so much better having my tax savings account and every time I get paid from of these gigs, just transfer over some $. I’m not going to get caught off guard again. And I hope my income exceeds last year, so this is a good lesson to learn now.

  6. Umm, if you’re getting a tax refund, it means you’ve been giving the government an interest-free loan. I assume that this year you’ve been throwing your earnings toward your debt, not spending it, so you’ve actually saved yourself money by ending up with a tax bill.
    Anne @ Unique Gifter recently posted…Tax Pain Relief GiveawayMy Profile

    • deardebt says:

      Interesting perspective. I’ve realized I have been giving the government an interest free loan all these years I’ve gotten a refund and I wanted to change that this year. I guess I did 🙂 I’m trying to find the sweet spot and have played around with my withholdings. Luckily, the bill isn’t too bad and taught me a lesson for next year!

  7. E.M. says:

    I’m sorry that owing came as a surprise! Honestly, one of the reasons I’m a little hesitant to get into side-hustling is the tax issue. I haven’t seen anyone cover it in-depth yet, though I’m sure it’s out there somewhere. After two unexpected car expenses this week, I’m hoping for some extra money. Thankfully this week I should be receiving overtime at my job.
    E.M. recently posted…Going the DIY Route: Fixing the CarMy Profile

    • deardebt says:

      Just allocate a portion of the income to a tax savings account be prepared. Don’t let it deter you from making more $$$. You are a money making machine! Haha, ok, but you know what I mean right? 🙂

  8. We owe for the first time ever as well. I knew we would owe some, but we had thousands of dollars of car sale bonuses that went untaxed for some odd reason as well. Boo!
    Erin @ Red Debted Stepchild recently posted…Minimalism: My Shit Doesn’t Own MeMy Profile

  9. We started ours and right now we owe about $1,000. Booooo! I’m going to go back and double-check before we file anything, though. But I know it’s better that I have the interest-free loan than the government, so I’m trying not to be too upset. It just sucks having to give the government more money that was already snatched out of my paycheck! ..come to think of it, to me it sucks giving anyone money out of my paycheck 😉
    Kali @ CommonSenseMillennial recently posted…Why The Millennial Generation is Going to Be OkayMy Profile

    • deardebt says:

      Owing sucks whichever way you put it. I’m sorry you owe, but you are right, it’s not all that bad if you consider you didn’t give the government an interest-free loan. I wish all my dollars could go straight to debt — but I guess taxes have their purpose.

  10. eemusings says:

    arrrgh WORST. I feel your pain. Since I started freelancing I’ve gone from always getting refunds to owing. The worst was getting slapped with a $1200 bill a couple years ago.
    eemusings recently posted…Link love (Powered by custard and smoked salmon)My Profile

  11. anna says:

    I mostly evened out, but wonder what next year’s will look like if we file joint since B almost always owes. That’s a really smart idea about banking a percentage for your independent contractor work, hopefully that will ‘lessen the blow’ for next year’s taxes!
    anna recently posted…I’m Ready to “Give Birth” to This Wedding!My Profile

    • deardebt says:

      I’ll be curious to see how it turns out for you. I actually just looked into whether it’s cheaper to be married or single — it looks like it’s cheaper to be married if you are lower income, which we are, but then there are penalties the higher your income. Maybe we will get married for a tax break? Ha!

  12. Yeah, that is something I am always interested in with all you crazy busy side hustlers. Those extra bits here and there aren’t taxed properly for your overall income, so it can bite you a bit come tax time.

    I have a large refund coming due to many tuition tax credits, and having high taxes in my province. I cannot wait to dump big chunks of that on my debt. 🙂
    Alicia @ Financial Diffraction recently posted…Remember, the Internet is Forever.My Profile

  13. Peter H. says:

    For me, it’s the other way around. I use to pay so much taxes at the beginning of the year as a business owner, it’s weird feeling to receive so much now that I took on a teaching job. I must say receiving check from IRS is sweet and I actually look forward to this time of the year. Sorry, didn’t mean to run it in.
    Peter H. recently posted…Life of Drug Cartel in Mexico.My Profile

  14. Michelle says:

    I’m sorry to hear that! I think it’s great that you set up the new tax payment account. I separated my side hustle money so that I can easily figure out what I owe as I focus more on side hustling. I don’t want the Tax Man to cometh to my house anytime soon.
    Michelle recently posted…Side Hustling out of my Verizon Contract or Hello Republic WirelessMy Profile

  15. Debt Hater says:

    Sorry to hear about that, but at least it was (relatively) small amount that you owed to them. I know I would hate it psychologically as well but it’s actually much better than getting a huge tax return. If you are getting money back, that means you technically loaned the government your money for no interest. This year – you ended up doing the opposite. So there is a positive side to that even if your brain doesn’t think so at first!
    Debt Hater recently posted…What Did You Do For Valentine’s Day?My Profile

    • deardebt says:

      Yes, originally I thought it was going to be 1k or more! But there was an error in what I input. It is good I guess that I got the most out of my money, but not getting a refund.

  16. La Tejana @ Debt Free Tejana says:

    Oh lady! I’m so sorry! I completely understand he pain of that (I actually have a post line up for this too, haha). I got my taxes done last week and for the first time in my life I owe! Trust me, it took all I had to not cry in the middle of H&R block. So I cried in my car. And on the phone to my Dad. And maybe a little bit that night before I went to bed…

  17. “You are not alone. You are not a loan.”

    I LOVE THAT!!!!

    Anyways, we turned in our taxes to our taxman on Valentine’s Day. I’m always afraid that we are going to owe. Last year we paid a couple grand because we took out a 401K loan to purchase our home in 2012. But, hopefully we are just about even and we won’t get any back this year either. I would rather have no refund during tax season. This means that I withheld just the right amount of taxes that we are suppose to pay in for the year and that I am getting more of my money that can work for me.
    Ron @RunningFromDebt recently posted…Happy Valentine’s DayMy Profile

  18. Sorry to read about your tax bill but glad you’ve got your savings account sorted out for that. I’ve just filed my tax return here, I didn’t owe anything but didn’t get a refund either. I should really set up a tax savings account just in case, even I don’t use the cash, it could go off the debts at the end of the financial year.
    Hayley @ A Disease Called Debt recently posted…Why having secret debt is a bad ideaMy Profile

  19. I havent’ finished mine yet, but I am praying I don’t owe this year. I’ve never owed on Federal before. I’ve owed the state, but usually only like $20-30 which I can handle. LOL! I am hoping for a nice refund to use on my debt and/or savings goals. But, it’s hard to say as I have more income this year that isn’t taxed…
    Shoeaholicnomore recently posted…My Schedule: What Can GiveMy Profile

  20. Morgaine says:

    Man that sucks! I haven’t had to owe yet (knock on wood) but lately because we’ve been making good RSP (401K) contributions which are tax deductible. I always try to figure out my taxes early enough so that if I have to make extra contributions before the deadline, I can (Canadians have up to 2 months into the new year to contribute for the previous year). Good on ya to start that tax savings account and to be able to pay back the $300 right away, it definitely sucks but its better than being surprised again!
    Morgaine recently posted…Weekly Spending: February 10 – 16My Profile

    • deardebt says:

      Yes, the savings account will help tremendously. No more surprises for this girl. I only like fun surprises 🙂 Good for you for not owing and making good contributions to your retirement. Yeah!

  21. Ugh, no fun! I was so worried I’d owe money this year and didn’t have it. Luckily the initial look of having to pay extra taxes wasn’t an issue and I’m getting a small-ish refund. It’s so much better than having to pay, even if it is loaning the government money for the year!
    Fig @ Figuring Money Out recently posted…Tax Time! TurboTax Deals & AdviceMy Profile

  22. Ugh, that’s such a bummer. But you’re right- definitely triple check your taxes. I thought I was going to owe about $600 until I realized I had made a HUGE clerical error that actually resulted in a refund. But like you said, don’t get discouraged. I haven’t done mine yet, but I’m hoping for a refund.
    Ryan @ Impersonal Finance recently posted…you vs. the economyMy Profile

  23. Shannon @ Financially Blonde says:

    Ugh! It’s the worst to owe money, especially when you are not expecting it. We had a big tax bill last year for a number of reasons, and I complained about the government to my husband for about three months straight. This year we feel prepared, but at the same time, I have not started the process because I don’t know if I can handle taxes on top of this depressing snow in NY. I feel like I have to be in a warmer and better mental state to handle the IRS.
    Shannon @ Financially Blonde recently posted…Music Mondays – Sweet Child O MineMy Profile

    • deardebt says:

      Haha I’d do the same thing. I damn near had a panic attack when I thought it was more. Luckily it turned out to be “only” $300. I’m with you on the weather — it’s so rainy in Portland, I need some vitamin D!

  24. Liz says:

    Never fun to pay in..especially when you’ve already had some taxes withheld. There’s just something that’s more psychologically pleasing about getting a refund even though it means you should have had these funds in your bank account the entire time. oh well!
    Liz recently posted…Take Advantage of an Unexpected Opportunity?My Profile

  25. We owed $1,200 one year and I literally cried. It was so frustrating! I’m pretty sure I’m getting a huge refund this year because I know that I overpaid on my estimated quarterly taxes and I put a bunch of money in a SEP IRA which will lower my liability.
    Holly@ClubThrifty recently posted…Social Finance: Responsibility and ProfitMy Profile

  26. Taxes are such a bummer. Sorry to hear you owe. I haven’t done mine yet this year (employer messed up my W2s and had to issue a new one). I’m hoping I don’t owe, but suspect that I do because of my side hustle income. This year if I end up owing I’m definitely going to start doing quarterly taxes next year.
    KK @ Student Debt Survivor recently posted…Cancun on a Budget-Westin Resort & SpaMy Profile

  27. Laura says:

    “You are a not alone. You are not a loan.” LOL! Nicely done.

    Owing money definitely sucks. But it’s good that going forward you will start to put money aside for taxes.

    I was glad this year that I got back $2,000 and was able to make big payments towards my debt.

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