Underpayment penalty increased to 8%.

News

by Jesse O’Neill

The IRS penalty for underpayments has nearly tripled since 2021, putting workers and consultants in the gig economy at greatest risk of having to pay Uncle Sam large sums.

As of October 1, the IRS will now charge 8% interest on estimated tax payments, up from 3% two years ago. According to the Wall Street Journal.

The penalties apply largely to salaried workers who don’t have their taxes withheld and fail to make estimated quarterly payments before filing their taxes in April.

Workers with taxes withheld will still be hit with the new higher penalty if they do not accurately calculate and pay taxes on any additional income, as will people who receive higher-than-expected dividend payments.

Taxpayers who change their withholding to get more weekly cash may also face problems, said Carla Dennis, an enrolled agent in La Palma, California.

“It’s a cascading problem: putting them on a payment plan, creating a budget so they don’t fall into that situation again,” she said.

The increased penalty came after the IRS collected $1.8 billion in penalties for underpayments from about 12.2 million Americans in fiscal year 2022, the newspaper reported.

Penalties can be avoided by paying at least 90% of your tax bill before filing, or having a difference of less than $1,000 — whichever is higher, according to the IRS.

Filers who pay 100% of the previous year’s tax bill will also be exempt — a number that rises to 110% for those who earn more than $150,000 or married taxpayers who file separately and earn at least $75,000.

“It’s a cautionary tale for people to think about as we approach the end of the year. Are you where you need to be?” Joseph Doerer, a certified public accountant and certified financial planner at Mezzasalma CPAs in Tinton Falls, New Jersey, told the magazine.

Samit Dorge, a marketing executive in Warren, New Jersey, learned about the fines the hard way after he was hit with a four-figure underpayment penalty on top of an already large tax bill because he simply failed to make any estimated payments.

“Now I take care of taxes all year long. I don’t want the giant hit in April,” Dorge, one of Doerrer’s clients, told the newspaper.