IRS move could cost some taxpayers big

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The Internal Revenue Service (IRS) is upping the ante for those who underpay their taxes by increasing the interest penalty assessed during next spring’s tax filing season.

Earlier this fall, the IRS increased its interest penalty on estimated tax underpayments to 8% — a notable increase from 3% just two years ago. The IRS stated that the interest penalty is assessed quarterly and that for taxpayers other than corporations, the assessed interest rate is the short-term federal interest rate plus three percentage points.

Self-employed and independent contractors, including many gig workers, are at risk of being hit with the underpayment penalty if they fail to pay the amount the IRS believes they owe. Taxpayers will not have to pay penalty interest for underpayment if the balance due is less than $1,000 after taking into account their credits and other tax account information.

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The Internal Revenue Service increased the interest penalty for underpayment of estimated taxes from 3% to 8%. (Andrew Harrer/Bloomberg/Getty Images)

These employees are required to make estimated tax payments at least once a quarter if they have not withheld at least 90% of their taxes 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 do not affect most taxpayers who are W-2 employees and have tax payments withheld from every paycheck they receive. In most of these cases, taxpayers are ultimately entitled to a tax refund rather than being assessed a penalty for underpayment.

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IRS Tax Return Form 1040

Taxpayers who are independent contractors or self-employed may face underpayment penalties if they fail to pay their estimated taxes at least once a quarter. (iStock / iStock)

Joseph Doerrer, an accountant and financial planner in New Jersey, told the Wall Street Journal: “This is a cautionary tale that everyone should think about as we approach the end of the year. Are you where you should be?”

Sameet Durg, a marketing executive, was surprised when he went to Doerrer to prepare his taxes when he learned that, in addition to a large tax bill in April, he owed an underpayment penalty of several thousand dollars for not reporting regular payments estimated tax liabilities from his consulting income.

“Now I pay attention to taxes all year round,” Durg told the Journal. “I don’t want the giant to strike in April.”

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The IRS has a withholding estimate tool that taxpayers can use. To use the tool, taxpayers must enter information from the previous year’s tax return, as well as relevant pay stubs and taxable income sources.


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