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the Internal Revenue Service (IRS) It increases the risk for those who underpay their taxes by increasing the interest penalty that will be assessed next spring’s tax filing season.
Earlier this fall, the IRS increased the interest penalty on… Estimated tax payments to 8% – a notable jump from 3% just two years ago. The IRS noted that the interest rate penalty is set quarterly and that the rate assessed for non-corporate taxpayers is the federal short-term rate plus three percentage points.
Self-employed workers and independent contractors, including many gig workers, will be at risk of being hit with an underpayment penalty if they fail to pay the amount the IRS believes they owe. Taxpayers do not face an interest penalty for underpayment if the balance owed is less than $1,000 after taking their balances and other tax account information into account.
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The Internal Revenue Service raised the interest penalty for underpayment of estimated taxes to 8% from 3%. (Andrew Harrier/Bloomberg/Getty Images)
These workers are required to make estimated tax payments at least once each quarter if they do not have at least 90% of their taxes withheld during regular pay periods. For example, taxpayers subject to this payment program will make the estimated payment for the fourth quarter of 2023 by January 16, 2024.
The changes will not affect most taxpayers W-2 employees Tax payments are withheld from every paycheck they receive. In most of these cases, taxpayers ultimately deserve a tax refund rather than face an underpayment penalty.
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Taxpayers who are independent contractors or self-employed may face underpayment penalties if they fail to pay their estimated taxes at least once every quarter. (iStock/iStock)
Joseph Doerer, a certified public accountant and financial planner in New Jersey, said: The Wall Street Journal“It’s a cautionary tale for people to consider as we approach the end of the year. Are you where you need to be?”
Samit Doerrer, a marketing executive, was surprised when he went to Doerrer to prepare his taxes to learn that he owed an underpayment penalty that ran into thousands of dollars on top of a large tax bill in April because he had not routinely made estimated payments on taxes owed from his consulting income.
“Now I take care of taxes all year round,” Dorge told the newspaper. “I don’t want the giant hit in April.”
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The IRS has a tax withholding estimator tool available for taxpayers to reference. To use the tool, taxpayers will need to enter information from the previous year’s tax return, as well as relevant pay stubs and sources of taxable income.