“I made a lot more money this year than last year. Will I owe the IRS a big bill?” If that’s the question you typed into a search bar at 11 p.m., the honest answer is: probably yes, and probably more than you think.
An increase. A bonus. About 1099 income on the other hand, maybe a partner who moves in on his own salary. All good news and all capable of pushing you into a place your withholding was never designed to handle.
The rest of this piece follows a fictional but very ordinary reader. Call them someone in their late 20s who had a comfortable W-2 salary last year and will have a much higher total this year, thanks to a promotion and a freelance gig on the side.
Their W-4 hasn’t been touched in years. Anything that goes wrong for them goes wrong for many people in their 20s and 30s. Let’s walk through it.
Growth is not the problem. Intact W-4 is
Our new earner assumes their employer handles their taxes correctly. Payroll takes something out of every check. It appears on the payment slip. Case closed, right?
Not enough. A W-4 tells your employer how to withhold based on the photo you gave them the day you fill it out. If that day was several years ago, when you were doing significantly less, the form still assumes a version of your life that no longer exists. Payroll systems don’t magically know you got promoted, took a second job, or opened a Shopify store on the weekends.
The move no one talks about is boring and free: pull your most recent payslip, plug the numbers into the IRS Withholding Estimate, and update your W-4. Do it once a year. Do it every time your income changes by more than a few thousand dollars. Our reader, had he done so mid-year, would have caught a significant shortfall before turning into an April surprise.
That side gig takes its toll and no one pays for it
Back to our reader. Say some of that new income came from freelance design work paid during 1099s.
On the W-2 side, Social Security and Medicare are automatically taken and the employer covers half. On the 1099 side, you are both the employee and the employer. This is the self-employment tax, a combined Social Security and Medicare tax that sits on top of regular income tax.
In a significant portion of net income from freelancers, that self-employment layer alone can go into four figures. Add federal income tax to their mix and it’s easy for a side hustle to generate one invoice that does not appear anywhere for each payment stub. The IRS asks for that money in quarterly installments over the course of the year, not in a lump sum next April.
Two habits prevent this spiral:
- Delete a fixed percentage. Every time a customer pays you, move a healthy portion of it to a special one savings account. Pretend the money was never yours. When the quarterly deadlines hit in April, June, September and January, the money is already there.
- Follow the discounts as you go. Software subscriptions, a portion of your phone bill, mileage on client meetings, home office. Waiting until March to reconstruct a year’s worth of expenses from memory is how people leave real money on the table.
The 401(k) is the best leverage you’re not pulling
This is where the story gets more optimistic. Additional income creates additional tax. It also creates additional room to move money to countries where the tax code is rewarding. For our reader, the single most powerful lever is the workplace retirement plan.
of the IRS announced that employees can contribute up to $24,500 to a 401(k) in 2026 and up to $7,500 to an IRA. Every pre-tax dollar you transfer to a traditional 401(k) reduces this year’s taxable income by the same dollar. If our reader were to increase their contribution rate by a few percentage points, they would shift thousands of dollars of taxable income into their future.
This is not a scam. This is the deal that Congress wrote. The people who build real wealth in their 30s aren’t the ones with the biggest salaries. They are the ones who noticed the levers and pulled them earlier than everyone else.
If you rent, delete this. If you own it, read it twice
Now suppose our reader bought a condo last year in a state with real income and property taxes. California, New York, New Jersey, Illinois: choose your taste.
Suddenly they’ve got mortgage interest, property tax bills, and state income tax withheld, all piling up on the itemized side of the ledger.
For years, the state and local tax deduction limit made it feel meaningless to most new homeowners. That changed. of Salt cap it jumped from $10,000 to $40,000 starting in 2025 and increases slightly each year until 2029.
For someone with a meaningful state income tax bill and a real estate tax bill, that cap is used to leave real money trapped. Now there isn’t.
This does not mean that everyone should specify. The standard deduction is even higher for many files. But if you’re a homeowner in a high-tax state and you’ve been on autopilot since 2018, this is the year you actually run the numbers head-on. Don’t take the standard deduction because you always have.
When you just hire someone
Our reader has now received a W-2, a 1099, estimated quarterly payments, a mortgage, a state return, and a 401(k) contribution that they may want to increase before December 31st. This is when doing it yourself in TurboTax stops being a symbol of savings and starts being a way to pay hundreds or thousands of dollars.
You don’t need a full-time accountant. You need a conversation, once a year, with someone who does this for a living. A true tax professional will find deductions you didn’t know existed, tell you if an S-corp election makes sense for side income, and point out anything about your state return that a national software package mishandles. In California, for example, a firm like Robert Hall & Associates builds strategy around country-specific rules, which national tools tend to treat as an afterthought.
Quiz: if your return this year includes two of the items on the list below, get help.
- Income from self-employment. Even a few thousand dollars in 1099 work changes the shape of the return.
- A movement between states. Two partial year returns, two sets of rules, one very confusing software.
- A home purchase or sale. The closing documents contain deductions that people usually miss.
- Capital compensation. RSUs, ISOs, and ESPPs each come with their own tax pitfalls.
- A significant increase in income. New brackets, new write-offs for the loans you’ve claimed, and often a first exposure to estimated taxes.
An afternoon now beats a panic in April
Back to the reader we started with. If they update their W-4 tonight, open a savings bucket for freelance cash, and delay their 401(k) contribution by a few percentage points before the year-end paycheck, they’ve rewritten their April bottom line.
No new income needed. No rush. Just an afternoon of attention.
Making more money is the goal. Keeping more of it is a skill in itself. No one teaches it in school and no one at your job will knock on your desk to remind you. But the levers are all there, sitting in plain sight, waiting for the version of you that decides this is the year to pull them.
Photo by Markus Winkler: Unsplash
