The Surprise Bill Coming to Those Who Underpay Their Taxes

[question everything]

Failing to keep up with tax payments now could lead to an expensive surprise come next spring. As of Oct. 1, the Internal Revenue Service is charging 8% interest on estimated tax underpayments, up from 3% two years ago. The increase is one of the many effects of rising interest rates.

These higher penalties, which can run in the hundreds or even thousands of dollars, are particularly relevant for gig workers and consultants who don’t have taxes withheld and figure they can pay their taxes come April. People who get steady paychecks with tax withholding could also be affected if they have additional income and get the math wrong.

(snip)

Beyond underpayment penalties, the higher total tax bills for millions of Americans increase the risk that many won’t be able to pay their full balance in April. Failing to pay all of your tax bills can lead to more penalties and—in the worst case—IRS collection actions including liens and levies. The U.S. tax system is pay-as-you-go, meaning you should make payments as you earn income. That can be done through withholding or by making quarterly—or even more frequent—tax payments during the year.

To avoid underpayment penalties, most filers must pay 90% of their taxes through withholding during the calendar year, or through estimated payments due quarterly. The payment for the fourth quarter of 2023 comes due Jan. 16, 2024. The IRS won’t charge an underpayment penalty if the balance due is less than $1,000 after taking into account withholding and credits. (Though it is called a penalty, it is essentially interest tied to the federal short-term rate.)

More..

https://archive.is/w3MCZ