Higher income this year often means a larger tax bill than many people expect. Raises, bonuses, and freelance earnings all push your income into brackets where more money gets withheld or owed to the IRS.
The mistake most people make: they don't adjust their W-4 withholding during the year. If you got a raise or took on side gigs generating 1099 income, your employer may still be withholding taxes at your old rate. That leaves you scrambling in April when you discover you owe thousands.
The fix requires action now, not in January. Update your W-4 with your employer to reflect your new income level. The IRS W-4 form lets you adjust how much gets taken from each paycheck. More income means you need more withheld unless you want a surprise bill.
For 1099 income from freelance work or consulting, the stakes are higher. You owe both income tax and self-employment tax, which runs 15.3 percent on net earnings. Many people underestimate this burden and fail to set money aside quarterly. The IRS expects estimated tax payments four times a year, not one lump payment in April.
Calculate your total expected income for the year, not just what you've earned through November. Include bonuses you know are coming, expected year-end commissions, and all freelance revenue. Use the IRS tax tables or a calculator to estimate your total liability.
If you're a W-2 employee with only a raise, adjusting your W-4 solves the problem. If you have 1099 income, open a separate savings account and deposit enough each month to cover taxes. A safe estimate: set aside 25 to 30 percent of freelance income.
You can also make an estimated tax payment directly to the IRS before year-end to