Underpayment Penalties: What They Are & How They Add Up!

Underpayment Penalties & Quarterly Taxes

underpayment penalties helpIf you just started receiving income outside of your W2 wages or decided to work as a contractor, you probably have plenty of new financial information to juggle. Changes in how your taxes are managed often are overlooked by the average taxpayer. Unfortunately, ignoring your taxes until it is time to file in April leads to underpayment penalties raising your taxes much higher than they need to be.

What Are Underpayment Penalties?

Contrary to what most people believe, paying your taxes isn't an annual event. Your taxes are paid throughout the year. If you paid too much, the IRS refunds some back to you. If you paid too little, you pay the IRS what you still owe. For most taxpayers, their employers withhold taxes from every paycheck and send it to the IRS. However, there are situations where the taxpayer shouldn't assume that this will be done automatically. The following examples are few of the situations where the taxpayer needs to make quarterly estimated tax payments.

  • Landlords receiving rent checks.
  • Business owners receiving income.
  • Contract workers receiving 1099 checks.

These are all circumstances where the taxpayer needs to file and pay quarterly estimated taxes. These need to be done every March, June, September, and December. There are special rules for who is and who isn't required to keep up with quarterly taxes. Err on the side of caution to avoid underpayment penalties.

How Do Underpayment Penalties Accrue?

An annual 4% in underpayment penalties is added to your IRS tax debt for every day that you are overdue for your quarterly estimated payments. So, if you should have paid the IRS $8,000 every quarter and paid nothing, you would wind up owing $32,455.29 by tax season.

How Do You Avoid Underpayment Penalties?

The best way to avoid underpayment penalties is to keep up with quarterly estimated payments. Every quarter, pay at least 90% of your estimated tax or 100% of what last year's return shows you owed for the same quarter. Choose whatever payment is smaller. If you owe less than $1,000 in estimated taxes, you may avoid underpayment penalties entirely.

What If You Already Have Underpayment Penalties?

If you find you cannot pay your debt and the underpayment penalties, you actually have more options than you may know about. If you have a valid reason for not paying your estimated taxes on time, you may be able to remove the underpayment penalties by filing for penalty abatement. If you do not qualify for penalty abatement, you can try to settle your debt down or enter into a payment plan. It is a good idea to consult with a tax debt professional before deciding what is the best way to handle your tax debt and underpayment penalties, however.

Find out what you can do about your underpayment penalties! Consult a professional. Call now or fill out the form below for a free tax debt consultation to learn how to pay your tax debt and avoid future underpayment penalties! We'll only connect you with a tax debt relief company holding at least a B rating with the Better Business Bureau.

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