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If Americans pay their estimated taxes late, they could be in line for a shocking bill from the IRS this spring. Last October, the IRS increased the self-employed taxpayer penalties for filing late or inaccurate payments - or not paying any estimated taxes - to 8%, nearly triple the previous rate of 3%.
In an effort to tighten monetary policy, the Federal Reserve sent interest rates soaring last year to their highest level since 2001. In order to calculate underpayment penalties, the IRS adds 3 percentage points to the benchmark federal funds rate.
The IRS warned that a growing number of taxpayers are being assessed estimated tax penalties, which can amount to several hundred dollars. However, it is generally possible to avoid a penalty if a taxpayer pays at least 90% of his or her taxes during the year.
If you are an average W2 employee, withholding taxes from your income is an obvious option. Taxpayers can adjust their withholding by completing their W4 form with their company's HR or payroll department. If you believe you will have a shortfall, you can also make additional estimated payments throughout the year.
W4 Form 2024 | Filling out the W-4 Tax Form
However, self-employed individuals, 1099 contractors, and freelancers should pay their taxes quarterly as they do not have taxes withheld from their income. Utilizing the IRS Online Accounts, Direct Pay, or EFTPS are the most efficient ways for taxpayers to pay quarterly electronically.
Experts recommend paying as much as you can by the deadline instead of waiting to pay the entire tax bill to avoid potential self-employed taxpayer penalties if you cannot make the full payment.
Michael Hoefke, Director of Enrollment for Community Tax Relief, also suggested paying more frequently. "Our self employed clients often have the misconception that they must pay quarterly; I always recommend they pay monthly if they can, just like any other bill. That way, it becomes more of a routine and practice they can stick with."
The failure to make a quarterly payment this year may result in a penalty in the future. Nevertheless, paying by April 15 could help reduce or eliminate any financial fee owed to the IRS.
Sources
"W4 Form 2024 | Filling out the W-4 Tax Form" - Money Instructor
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Frequently Asked Questions
What is the current IRS penalty rate for self-employed taxpayers who underpay or miss estimated tax payments?
As of October 2023, the IRS increased the underpayment penalty rate to 8%, which is nearly triple the previous rate of 3%. The IRS calculates this rate by adding 3 percentage points to the benchmark federal funds rate, which rose to its highest level since 2001 after Federal Reserve rate hikes.
How can self-employed taxpayers avoid an underpayment penalty?
Generally, taxpayers can avoid an underpayment penalty by paying at least 90% of their total tax liability during the year. Experts also recommend paying as much as possible by each quarterly deadline rather than waiting to pay the full amount at once, and making payments through IRS Online Accounts, Direct Pay, or EFTPS for convenience.
Do self-employed individuals really have to wait and pay taxes quarterly, or can they pay more frequently?
Self-employed individuals, 1099 contractors, and freelancers are required to pay estimated taxes on a quarterly basis since no taxes are withheld from their income. However, tax professionals like Michael Hoefke of Community Tax Relief recommend paying monthly if possible, as it builds a consistent routine and can make managing tax obligations easier.
What options do W-2 employees have to avoid a tax underpayment penalty?
W-2 employees can avoid underpayment penalties by ensuring enough taxes are withheld from their paychecks throughout the year. They can adjust their withholding by completing a W-4 form with their company's HR or payroll department, and can also make additional estimated payments during the year if they anticipate a shortfall.
What happens if a self-employed taxpayer misses a quarterly payment deadline?
Missing a quarterly estimated tax payment can result in a penalty being assessed by the IRS, which now stands at 8%. However, making a payment by April 15 may help reduce or eliminate any financial penalty owed, so taxpayers should pay as much as they can by that deadline rather than waiting any longer.
About the Author
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Nick Charveron is a tax professional at IRS.com with expertise in U.S. federal and state tax law. Their articles are written to help taxpayers understand complex tax topics in plain English.