Why is it important for individuals to correctly calculate their tax liability?

A tax liability is a tax debt you owe to a taxing authority—aka the IRS, state government or local government. Essentially, if you’re paying taxes on it, it’s a tax liability.

Your total tax liability is the total amount of tax you owe from liabilities like income tax, capital gains tax, self-employment tax, and any penalties or interest. This also includes any past due taxes that you haven’t paid from previous years.

If you have a regular job, you should have filled out a W-4 form with your employer. Based on that form, your employer withholds a portion of your income to cover your tax liability and sends it to the government on your behalf.

If you’re self-employed or own a small business, you’ll likely be responsible for calculating your own tax liability and sending in quarterly tax payments throughout the year.

Now, if the amount withheld from your paycheck or the amount you send in for the year is less than your total tax liability, you’ll have to cut Uncle Sam a check for the difference come tax season. If your total withholding or payment amount is higher than your total tax liability, then you’ll get a refund.

This is where knowing your tax liability is important—you want to avoid both of those situations. No one wants to owe more taxes when April rolls around, and a refund only means you overpaid for an entire year. Getting your withholding to line up with your income tax liability is the end goal. You want to break even when tax season arrives!