Huge Penalty Increase for IRS UnderpaymentShare this post
IRS Raises Penalty for Underpayment
Self-employed workers and independent contractors are at risk of underpayment penalties of 8% if they fail to pay what the Internal Revenue Services (IRS) thinks they owe. The new penalty will apply to next spring’s tax filing system and more than doubles the previous penalty of 3%.
People who are self-employed, freelance workers, and anyone who generates income in any other way often have a particularly complicated tax filing process as they calculate precisely what amount to send the IRS—which is why many opt to pay estimated taxes quarterly taxes throughout the year.
Taxpayers sometimes miscalculate the amount they owe the IRS and underpay their share. In these cases, the agency will then charge the person interest on what they owe as well as additional percentage points to the taxpayer’s annual rate. Unfortunately, this can result in a hefty amount getting added on top of one’s standard tax bill.
Will this Affect You?
Gig workers, self-employed and independent contractors are required to make estimated tax payments at least once each quarter if they don’t have at least 90% of their taxes withheld during the regular pay periods. Taxpayers subject to this payment program will make the estimated payment for the fourth quarter of 2023 by January 16, 2024. This is a cautionary tale for taxpayers. Taxpayers need to know that the IRS has raised its underpayment penalties, which could result in some large fees being added to your bill.
There are still a few exceptions to who’s subject to a penalty. According to IRS policy, anyone who is found to owe a balance less than $1,000 isn’t liable. Neither is anyone who paid at least 90 percent of the taxes they owe for the year in question on time. Also, anyone who paid 100 percent of the amount they owed as estimated from the previous year on time each quarter is also off the hook.
The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates and trusts if you don’t pay enough estimated tax on your income or you pay it late. The penalty may apply even if we owe you a refund. Find how to figure and pay estimated tax on the IRS website.