What are the penalties for not paying estimated taxes?
The IRS reports that 10 million taxpayers were subject to estimated tax penalties in 2015,an increase of nearly 40% since 2010.
Will you be next?
If you didn’t pay the IRS enough tax through the year, either by payroll (or other) withholding taxes or by making estimated tax payments, you might get charged with an underpayment penalty.
The penalty is generally calculated by applying the current Federal interest rate (4Q 2017 was 4%) to the amount of the underpayment for the length of time it wasn’t paid. Rates are adjusted quarterly.
You can report the penalty when you file your 1040 (it can be a tricky process) or you can choose to let the IRS figure it and send you a bill (recommended method).
In certain situations, penalties won’t get charged
Some of those exceptions are:
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- You owe less than $1000 with your tax return or
- During the year, you paid in at least 90% of the tax for the current year (might be difficult to plan for this) or
- During the year you paid in 100% of the tax from the previous year’s return
- Casualty, disaster, or other unusual situation e.g.
- Taxpayer retired after reaching age 62 during a tax year subject to estimated tax payments
- Taxpayer became disabled during a tax year subject to estimates tax payments
- Your income wasn’t spread equally over the year and using the annualized income installment method eliminates the penalty
For a free guide to estimated taxes “5 Tips For Business Owners Who Want To Stay Out of Trouble With the IRS” click here.