You might owe state taxes even if you didn’t owe federal taxes. This can happen for a few reasons.
For example, maybe not enough tax was withheld from your paycheck, or you earned income from other sources, like freelance work or investments.
In this article, we’ll cover these reasons and more. By the end, you’ll have a clear idea of what state taxes you might owe.
What Are State Taxes?
State taxes are payments you make to your state government to help fund public services. These can include things like schools, roads, and public safety.
They’re similar to federal taxes but are handled at the state level.
Depending on where you live, you might pay income tax, sales tax, property tax, or a mix of these. Each state has its own rules, so what you owe and how you pay can vary.
Reasons Why You Might Owe State Taxes
Below are some of the reasons why you might end up owing state taxes.
1. Insufficient Withholding:
This is often the main reason people owe state taxes.
Basically, throughout the year, your employer takes a bit of money from each paycheck and sends it to the government as a prepayment for your taxes. This is called withholding.
The amount they take out is based on the information you give them on your W-4 form. This form tells them things like if you’re single, married, and how many allowances you’re claiming.
The problem is, if the amount taken out of your paychecks during the year isn’t enough to cover what you actually owe, you’ll have to pay the difference when you file your state taxes.
This can happen for a few reasons:
⦿ Starting a New Job:
When you start a new job, it can take a couple of paychecks for the right amount to be withheld. If you started working late in the year, there might not have been enough time for them to take out everything you owe.
⦿ Changing Your W-4:
If you claimed too many allowances on your W-4 (which means you told your employer to take out less money), you’ll probably owe money later. Some people do this to have more money in their paycheck right away, but it can mean a bigger tax bill later on.
Also, if you changed your W-4 in the middle of the year, the change might not have affected your withholding for the whole year.
⦿ Having Multiple Jobs:
If you have more than one job, each employer only takes taxes out based on what you earn from them. They don’t know about your other income, so the total amount withheld from all your jobs might not be enough.
2. Additional Income Sources
Now, on top of making sure enough is withheld from your regular paycheck, another major reason people owe state taxes is having other sources of income.
This one’s pretty straight.
If you earn money from sources other than your regular paycheck, that income is usually taxable too. Your employer only withholds taxes from your regular wages, so if you have other income streams, no taxes are being prepaid on that money.
This means you’ll likely owe taxes on it when you file. Here are some common examples:
⦿ Self-Employment Income:
If you’re self-employed, a freelancer, or have a side hustle where you’re not an employee, you’re responsible for paying your own taxes on that income. This includes things like driving for a rideshare company, selling goods online, or providing freelance services.
Since no one is withholding taxes for you, you’ll owe the full amount when you file.
⦿ Investment Income:
If you have investments like stocks, or mutual funds, you might receive dividends, interest, or realize capital gains (profits from selling investments). These are all generally taxable income at both the federal and state level.
Again, since no taxes are withheld on this income throughout the year, you’ll owe when you file.
⦿ Rental Income:
If you own rental property and receive rent payments, that rental income is taxable. You can deduct certain expenses related to the property, but the net income (rent minus expenses) is what’s subject to taxes.
Basically, any income you make that doesn’t already have taxes taken out will likely add to what you owe in state taxes.
3. Differences in State and Federal Tax Laws:
Now, this is where things can get a little more complex, but I’ll break it down simply.
Even if you’re familiar with how federal taxes work, it’s important to remember that each state has its own set of tax rules.
Think of it like this: the federal government sets the overall rules for the country, but states have the freedom to make some of their own rules within those guidelines.
This means that even if you didn’t owe any federal taxes, you might still owe state taxes simply because the rules are different.
Here are a few key differences:
⦿ Different Tax Brackets and Rates:
Both the federal government and states use a system of tax brackets, which are income ranges that are taxed at different rates. However, the income ranges and the tax rates themselves can vary significantly.
That’s between the federal government and individual states.
It therefore means, you might fall into a lower tax bracket federally but a higher one in your state, or vice versa.
⦿ Different Deductions and Credits:
Deductions and credits are ways to reduce your taxable income, which can lower your overall tax bill. However, what qualifies as a deduction or credit can differ between the federal and state levels.
Some states might offer deductions or credits that the federal government doesn’t, or they might have different rules about who qualifies for them.
⦿ Taxing Different Types of Income:
While most types of income are taxed at both the federal and state levels, there can be exceptions. Some states might tax certain types of income that the federal government doesn’t, or they might exempt certain types of income that are taxed federally.
For example, some states don’t tax Social Security benefits, while others do.
Because of these differences, it’s entirely possible to have a different tax outcome at the state level than you do federally. You might have owed a refund federally but end up owing money to your state, or vice versa.
It all comes down to the specific rules in place in your state.
4. Life Changes:
Big life changes can have a big effect on your taxes.
Things like your filing status or how many dependents you can claim might change.
You could also lose or qualify for new deductions or credits. Since state taxes often connect to federal rules, these changes can impact your state taxes too.
Here are a few key examples:
⦿ Marriage:
Getting married changes your filing status from “single” to either “married filing jointly” or “married filing separately.” This change can affect your tax bracket and the standard deduction you’re eligible for.
While these changes are reflected on your federal return, they also directly impact your state taxes in most cases.
⦿ Having a Child:
Having or adopting a child adds a dependent to your taxes.
This can bring some great tax benefits. For example, you might qualify for the child tax credit at the federal level and sometimes at the state level too. Your filing status might also change, like going from single to head of household.
These changes affect both your federal and state taxes.
⦿ Buying a Home:
Becoming a homeowner brings new tax considerations into play.
You might be able to deduct mortgage interest, property taxes, and private mortgage insurance on your federal return. Some states also offer similar deductions or credits.
These deductions can lower your taxable income, potentially affecting both your federal and state tax bills.
The important thing to remember is that these life changes can alter your tax situation in ways you might not immediately realize.
Managing Your Taxes and Income Documentation
Understanding why you might owe state taxes is the first step to managing your finances better. It’s important to keep records of your income and withholdings to avoid any surprises during tax season.
This matters even more if you have multiple income sources or go through big life changes during the year.
For small business owners, or freelancers managing income and deductions can get tricky. That’s where PaystubHero can be incredibly valuable.
PaystubHero offers a simple and efficient way to create professional-looking:
➡ Pay stubs: These provide a detailed breakdown of earnings, deductions, and taxes withheld, helping you track your income and ensure accurate tax calculations.
➡ W-2s and 1099s: These essential tax forms are necessary for filing your taxes and reporting income to the IRS. PaystubHero simplifies the creation of these forms, ensuring compliance and accuracy.
➡ Invoices: For freelancers and contractors, creating professional invoices is essential for getting paid and tracking income. PaystubHero can help you generate invoices quickly and easily.
By using PaystubHero, you can streamline your income documentation, making tax preparation smoother and less stressful.
FAQs
Common questions on why you might owe taxes are:
