When it comes to whether it is better to owe taxes or get a refund, the honest answer is neither extreme — the strongest financial position is landing as close to zero as possible, with either a small refund or a small balance due. A large refund means the federal government held your money all year and paid you nothing for the privilege. A large balance due can trigger penalties and interest that make the bill bigger than what you actually owed. The average federal refund in early 2026 was about $2,290, which works out to roughly $190 a month sitting in a government account instead of in yours.1Internal Revenue Service. Filing Season Statistics for Week Ending Feb. 6, 2026
Why a Big Refund Is Not a Win
A refund is not a bonus. It is your own money coming back after you overpaid throughout the year, and the IRS does not pay interest on what it held. Every dollar in a $2,400 refund is $200 a month you could have put toward a high-yield savings account, retirement contributions, or credit card debt charging 20 percent or more.
Some people like a big refund because it acts as forced savings — a lump sum they would not have set aside on their own. That instinct is reasonable, but an automatic transfer to a savings account does the same job and pays you interest along the way. The real advantage of accurate withholding is liquidity. You have the money when you need it, whether that is for an emergency, an opportunity, or just covering the month without leaning on a credit card.
Why Owing a Large Balance Is Worse
Owing a small amount at filing time is fine as long as you pay by the deadline. The problem starts when the balance is big enough to trigger the underpayment penalty, or when you cannot pay in full by the due date. For tax year 2025 returns, that deadline is April 15, 2026.2Internal Revenue Service. Pay Taxes on Time
Miss it, and the IRS charges a failure-to-pay penalty of 0.5 percent of the unpaid balance for each month or partial month the tax stays unpaid, up to 25 percent total.3Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax On top of that, interest runs at the federal short-term rate plus three percentage points, adjusted every quarter.4Office of the Law Revision Counsel. 26 USC 6621 – Determination of Rate of Interest As of the first quarter of 2026, that rate is 7 percent annually.5Internal Revenue Service. Quarterly Interest Rates Penalty and interest compound until the balance is paid off.
And a separate penalty applies even if you do pay the full balance by April: the estimated tax penalty, which the IRS can charge if you did not send enough money throughout the year in the first place.
The Safe Harbor Line Between “Fine to Owe” and “Penalized”
To avoid the estimated tax penalty, your total withholding and estimated payments during the year need to meet at least one of these thresholds:
- 90 percent of the tax you end up owing for the current year, or
- 100 percent of the total tax on your prior-year return.
The prior-year threshold rises to 110 percent if your adjusted gross income exceeded $150,000 ($75,000 if married filing separately). There is also a small-balance exception: if you owe less than $1,000 after subtracting withholding and credits, no penalty applies.6Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax
This is the practical line to plan around. Owing a modest amount at filing is not a problem, as long as your payments during the year cleared one of these bars. Many people aim to hit the 100 percent (or 110 percent) prior-year figure through withholding, which locks in safe harbor no matter how much their income rises. Then, if a good year pushes their final bill higher, they simply write a check in April without owing any penalty on top.
How to Land Near Zero
Once you know where the safe harbor lines sit, the mechanics of getting close to zero are straightforward. What you use depends on how you earn.
If You Are a W-2 Employee
Your employer withholds federal income tax from each paycheck based on the Form W-4 you filed. If that form no longer reflects your situation — new job, marriage, divorce, a new child, a working spouse, a side business — your withholding is probably off. Outdated W-4 information is the single most common reason people end up with a giant refund or a surprise bill.
You can submit an updated Form W-4 to payroll at any point in the year, and your employer will adjust withholding on the paychecks that follow.7Internal Revenue Service. Form W-4 – 2026 Employee’s Withholding Certificate Before you fill one out, run your numbers through the IRS Tax Withholding Estimator at irs.gov. It walks you through income, deductions, and credits, and tells you what to put on the W-4 to hit your target.8Internal Revenue Service. Tax Withholding Estimator Have recent pay stubs, your prior-year return, and any non-wage income estimates on hand when you start.
If You Have Self-Employment or Non-Wage Income
Income that is not subject to withholding — freelancing, self-employment, rental property, investment income — puts the responsibility on you to send estimated tax payments during the year using Form 1040-ES.9Internal Revenue Service. About Form 1040-ES, Estimated Tax for Individuals Payments are due four times a year: April 15, June 15, September 15, and January 15 of the following year.
IRS Direct Pay pulls the money straight from your bank account for free.10Internal Revenue Service. Pay Personal Taxes From Your Bank Account If your income moves around during the year, recalculate before each quarterly due date so you stay inside the safe harbor lines.
If You Owe and Cannot Pay
File anyway. The failure-to-file penalty is 5 percent of the unpaid tax per month, up to 25 percent — ten times the monthly failure-to-pay rate.3Office of the Law Revision Counsel. 26 USC 6651 – Failure to File Tax Return or to Pay Tax Filing an extension using Form 4868 gets you until October to submit the return, but it does not extend the payment deadline; interest and the failure-to-pay penalty still run on any balance not paid by April.11Internal Revenue Service. IRS Reminds Taxpayers an Extension to File Is Not an Extension to Pay Taxes
File on time, pay as much as you can, and then use one of the IRS payment options for the rest:
- A short-term payment plan gives you up to 180 days to pay in full, set up online at no cost. Penalties and interest continue during the plan.12Internal Revenue Service. Payment Plans; Installment Agreements
- A long-term installment agreement lets you pay monthly beyond 180 days. Setup fees run from $22 to $178 depending on how you apply and whether payments come out automatically. Low-income taxpayers may qualify for a fee waiver.12Internal Revenue Service. Payment Plans; Installment Agreements
If you have a clean record with the IRS, ask about First-Time Penalty Abatement. It waives the failure-to-pay penalty for one year as long as you filed the same type of return for the prior three years and had no penalties during that period.13Internal Revenue Service. Administrative Penalty Relief You can request the abatement before paying the tax in full. Interest still applies, but dropping the penalty can meaningfully shrink the bill.