this post was submitted on 23 Feb 2025
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How do you pay too many taxes? Aren't you supposed to be able to know how much to pay?
Taxes can get extremely complicated depending on your situation. In my relatively simple case as a contractor, I'm on the hook for calculating and paying taxes quarterly (since my employer(s) don't do it for me). The exact amount I'm meant to pay is
yearly income/4, which means I need to predict how much I'll earn throughout the entire year, which is impossible without a crystal ball.So I just pay what I think I'll earn, and at the end of the year calculate the difference from what I actually earned, and either send or receive a payment from the government. From the IRS point of view, whatever interest they end up paying me is probably less than the cost of government having a cashflow issue throughout the year without those quarterly payments.
Okay well that makes a lot more sense for someone that has to pay quarterly I guess. I guess this is a US thing. Luckily I never had to do my own taxes in Canada and looks like I'm never going to have to learn, but I'm interested in US accountingd
Employers deduct a part of your salary as taxes on every paycheck (usually monthly). But how much they deduct is based on your tax profile which is created by the tax authorities. It's typically based on expected yearly income. However, you are allowed (and encouraged) to update this number yourself.
So say you swap to a lower paid job, or work less overtime than you planned, you can change your expected annual income to reflect this in taxes paid. If you don't however, then you effectively pay too much taxes as your employer is basing the taxes on too high numbers.
Another reason is that you may have tax deductions that only gets computed into the total when you fill out your full tax report. So if you didn't bake those into your tax profile at the start of the year, you might get returns on your taxes (with interest).
You can also downplay how much taxes to pay through salaries, in which case you will owe back taxes when the full tax report is made.
I assume they have the same issues with waiting in the end of the year to round up stocks and other interest/dividend income.