IRS Penalty for Tax Underpayments Nearly Triples, Putting Gig Workers at Risk
By Jesse O’Neill
Published Dec. 3, 2023, 2:08 p.m. ET
The Internal Revenue Service (IRS) has nearly tripled the penalty for tax underpayments since 2021, posing a significant risk to gig economy workers and consultants. The increased penalty, which now stands at 8% interest on estimated tax underpayments, up from 3% two years ago, has left many taxpayers vulnerable to having to pay substantial amounts to the government.
According to The Wall Street Journal, the penalties primarily affect pay-as-you-go workers who do not have taxes withheld and fail to make estimated quarterly payments before filing their taxes in April. Additionally, individuals earning higher-than-expected dividend payments or those who change their withholding to receive more weekly cash may also find themselves in hot water with the IRS.
Karla Dennis, an enrolled agent from La Palma, Calif., emphasized the cascading problems that can arise from the increased penalties, including the need to set up payment plans and budgets to prevent future underpayment issues.
The IRS collected $1.8 billion in underpayment penalties from 12.2 million Americans in fiscal year 2022, prompting filers to be more cautious about their tax obligations. The fines, however, can be avoided by paying at least 90% of one’s tax bill before filing or by having less than a $1,000 difference, whichever sum is higher, as per the IRS.
Filers who pay 100% of the previous year’s tax bill would also be spared from the penalties. This percentage increases to 110% for higher-income individuals or married taxpayers who file separately.
One taxpayer, Sameet Durg, a marketing executive from Warren, NJ, learned about the fines first-hand after owing a four-figure underpayment penalty on top of an already large tax bill because he failed to make any estimated payments. Durg now pays attention to taxes year-round to avoid being hit with a large bill in April.
As the year-end approaches, tax experts are advising individuals to carefully assess their tax obligations to avoid facing hefty penalties in the future.