Skip to comments.IRS penalty for underpaying estimated taxes jumps to 8% of the shortfall from 3% two years ago - with freelancers and the self-employed most at risk
Posted on 12/03/2023 6:39:36 AM PST by Libloather
The IRS penalty for underpayment of estimated taxes is up sharply this year, with self-employed and freelance workers at the biggest risk of getting hit.
The penalty, calculated quarterly based on the Federal Reserve's benchmark rate, hit 8 percent on October 1, up from just 3 percent in early 2021, when Fed rates were near zero.
The penalty rate applies to shortfalls in estimated taxes, which self-employed workers pay the IRS quarterly based on their earnings for the period.
Employees who have income taxes deducted from their paychecks generally do not have to pay estimated taxes, and are unlikely to be impacted by the new fine.
But for the self-employed, the new higher fine is yet another consequence of the Fed's aggressive rate hikes, which the central bank has deployed to battle inflation.
The IRS calculates the underpayment penalty by taking the Fed's benchmark rate for the quarter and adding 3 percent.
According to the Wall Street Journal, the IRS assessed more than $1.8 billion in penalties for underpaying estimated taxes on nearly 12.2 million individual returns in fiscal year 2022.
The IRS expects workers to pay taxes as they go, whether through paycheck withholding for employees or quarterly payments for self-employed workers.
Those rules apply to the period in question — meaning that if you underpay estimated taxes for a single quarter, you could still be penalized even if you pay more than is owed for the entire year.
According to the IRS, you can avoid an underpayment penalty fine if your filed tax return shows you owe less than $1,000.
As well, anyone who pays at least 90 percent of what they owe for the tax year in question, or 100 percent of what they owed the prior year, is granted safe harbor from the fines.
(Excerpt) Read more at dailymail.co.uk ...
Knowing they are a special target sure encourages entrepreneurs and personal startups.
“The penalty, calculated quarterly”
It’s NOT quarterly. 3 months, 2 months, 3 months and then 4 months.
I'm probably going to make a quick estimate of my taxes today. I might be behind because I am getting 5% interest on savings rather than the small fraction of a percent I had for years. I'll toss in a January estimated payment if I'll owe too much.
Umm - No it doesn't.
They always target people who work productively and actually earn money, which is then taken and given to those who don’t work but have their hands out all the time ready to take the money that is given to them.
I use HR Block tax software for federal income tax. For year 2022 software computed my underpayment penalty and I sent total tax owed to IRS.
2-3 months later I got a check in mail from Treasury. First thought was it was fake phishing check. But it cashed fine at my bank. Another few weeks later I received a letter from IRS saying I had overpaid the penalty!
I guess HRB tax software has bugs.
That’s nasty if you are self-employed and your annual income can vary a lot. I’ve had years where I sent in way too much and years where I paid a penalty. There’s no win, no bonus, there is only no penalty, pay a penalty, or pay in too much and lose the use of/income from thousands of dollars for months.
And Hunter owes how much???
In tough times, the governemnt raises your taxes. And they hire 60,000 agents to hunt folks down.
“Umm - No it doesn’t.”
I know, I was being sarcastic.
They are doing everything they can in their power to discourage small business. It helps make that vacuum bigger so the big corporations can step in and fill it.
IRS penalty for underpaying estimated taxes jumps to 8% of the shortfall from 3%.
If true the Biden syndicate will lose a lot.
The SOBs knocked me out twice.
(Hence, my screen name.)
#8 I use H&R Block...
Is the penalty of 8% per year?
What if say last few years it was 3% and you did not pay, would they calculate the whole amount at 8% or 3% for the past years and then 8% for current year?
3% of amount + 3% of amount + 8% amount.
Just ah... asking.
Been there, had a couple of my businesses over regulated to death.
My best guess is if you are behind in payments, IRS would probably sock it to you at 8%. But I have no clue how IRS would tackle it.
I am surprised HRB software made an error in computing my penalty.
I heard it was 87,000 agents and they weren’t going to target the middle class
Hunter Biden is exempt.
The software is confusing to me. I cannot seem to find my way around easily. I want to see page 1, page 2, page 3 etc.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.