The Internal Revenue Service (IRS) is increasing the pressure on taxpayers who underpay their taxes by significantly raising the interest penalty that will be assessed in next spring’s tax filing season. This move has left many self-employed workers and independent contractors, including gig workers, at risk of facing hefty penalties if they fail to pay the amount the IRS believes they owe.
Earlier this fall, the IRS raised its interest penalty on estimated tax underpayments to 8%, a substantial increase from 3% just two years ago. The agency explained that the interest rate penalty is determined every quarter and for taxpayers other than corporations, the assessed rate is the federal short-term rate plus three percentage points.
Taxpayers who do not have at least 90% of their taxes withheld during regular pay periods are required to make estimated tax payments at least once each quarter. This means that those who fall under this payment program will need to make the estimated payment for the fourth quarter of 2023 by January 16, 2024.
According to Joseph Doerrer, a CPA and financial planner in New Jersey, this move by the IRS serves as a cautionary tale for individuals to carefully assess their tax obligations and make sure they are on track to meet them.
One individual, Sameet Durg, a marketing executive, shared his surprise when he learned that he owed an underpayment penalty of thousands of dollars in addition to a large tax bill in April because he wasn’t making periodic estimated payments on taxes owed from his consulting income. Durg’s experience serves as a warning for others to pay attention to their taxes throughout the year to avoid facing a significant financial hit during tax season.
The changes in the interest penalty are not expected to affect most taxpayers who are W-2 employees and have tax payments withheld from each paycheck, as they typically receive a tax refund rather than facing an underpayment penalty.
The IRS has a tax-withholding estimator tool available for taxpayers to use, allowing them to input information from their prior year’s tax return, as well as relevant pay stubs and taxable income sources, to ensure they are on track with their tax obligations.