The United States Tax Collection Agency IRS is intensifying the repercussions for those who are unable to pay their taxes in full by introducing a higher interest penalty during the forthcoming tax season in spring. In a marked departure from the 3% rate seen a couple of years back, the IRS has now increased the interest penalty for not paying the estimated tax to 8% this autumn.
In line with legal requirements, the IRS adjusts the interest rate penalty quarterly. For individual taxpayers, this rate is the federal short-term rate plus three percentage points. This increase particularly affects freelancers, independent contractors, and numerous individuals working in the gig economy, exposing them to potential penalties for underpaying taxes if they fail to pay the IRS’s stipulated amount.
IRS underpayment penalties and exemptions
It’s crucial to remember that an interest penalty for underpayment is not applicable if the amount due is under $1,000 after considering credits and other tax account details. Those affected are required to make quarterly estimated tax payments, especially if less than 90% of their tax is withheld in regular payroll periods. For instance, taxpayers with this obligation need to make their fourth quarter payment for 2023 by January 16, 2024.
It’s noteworthy that these changes won’t affect most taxpayers who are salaried employees with taxes automatically deducted from their paychecks. Typically, these individuals are more likely to receive a tax refund than incur an underpayment penalty.
Joseph Doerrer, a New Jersey-based Certified Public Accountant (CPA) and financial advisor, told The Wall Street Journal, “This is a wake-up call for individuals as the end of the year approaches. Are your finances where they need to be?”
When Sameet Durg, a marketing executive, sought advice from Doerrer for tax preparation, he was surprised to learn he owed a significant underpayment penalty, plus a large tax bill in April, due to not making regular estimated tax payments on his consulting earnings. Reflecting on this, Durg underscored the necessity of being attentive to tax obligations year-round: “I now keep an eye on my taxes throughout the year. I don’t want to be hit with a big financial burden in April. “The IRS offers a tax-withholding estimator tool online. To use this tool, taxpayers need to input information from their last tax return and current details from their pay stubs and sources of taxable income.