IRS penalty for underpaying estimated taxes jumps to 8% of the shortfall from 3% two years ago - with freelancers and the self-employed most at risk


The IRS penalty for underpayment of estimated taxes is up sharply this year, with self-employed and freelance workers at the biggest risk of getting hit.


The penalty, calculated quarterly based on the Federal Reserve's benchmark rate, hit 8 percent on October 1, up from just 3 percent in early 2021, when Fed rates were near zero.

The penalty rate applies to shortfalls in estimated taxes, which self-employed workers pay the IRS quarterly based on their earnings for the period.

Employees who have income taxes deducted from their paychecks generally do not have to pay estimated taxes, and are unlikely to be impacted by the new fine.

But for the self-employed, the new higher fine is yet another consequence of the Fed's aggressive rate hikes, which the central bank has deployed to battle inflation.




The IRS calculates the underpayment penalty by taking the Fed's benchmark rate for the quarter and adding 3 percent.

According to the Wall Street Journal, the IRS assessed more than $1.8 billion in penalties for underpaying estimated taxes on nearly 12.2 million individual returns in fiscal year 2022.

The IRS expects workers to pay taxes as they go, whether through paycheck withholding for employees or quarterly payments for self-employed workers.

Those rules apply to the period in question — meaning that if you underpay estimated taxes for a single quarter, you could still be penalized even if you pay more than is owed for the entire year.

According to the IRS, you can avoid an underpayment penalty fine if your filed tax return shows you owe less than $1,000.





As well, anyone who pays at least 90 percent of what they owe for the tax year in question, or 100 percent of what they owed the prior year, is granted safe harbor from the fines.  

Not every freelancer has to pay estimated taxes.

Generally, if you pay federal withholding through an employer, and have a small freelance 'side hustle,' you will not be required to pay estimated taxes each quarter.

The deadline to pay estimated taxes for the final quarter of 2023 is January 15, however, if you file your 2023 tax return by January 31 and pay all taxes you owe for the year, that deadline does not apply.

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FUCK the irs

I never found the old penalty for underpayment of estimated tax to be anything worth worrying about.  At 8% I might reconsider that.

It's very hard for my wife and me to estimate our tax liability for 2023.  Her medical expenses for this year are insane, much higher than 2022 for which we ended up having to fork over a little over $7K to the feds, while inexplicably getting about a $400 refund from the state.  

It's almost like elections have consequences.

Biden leading from the front on lowering fees.

Meanwhile in the banana republic

The online whores who make money showing skin, how would they even know how much to estimate?

Meh, they dont have the bite that they use too. They have to go after the low hanging fruit of those that actually participate with them.

I did a relatively small ROTH conversion last year and if I remember correctly there was a smallish fine or penalty of some type assessed,  I think I owed about $3K, I am doing another one this month for a smaller amount so I upped my tax withholding a bit not long ago.

The irs needs to be disbanded.

Commies suck.

“Show me the man and i’ll show you the crime.”

The IRS is an evil and immoral institution and I’d rather deal with anti-gunners than pro-IRS people.

FIRS.

In 2022, FIRS levied a $140 underpayment penalty against me EVEN THOUGH I RECEIVED A REFUND.  Just a letter, no explanation, no nothing.

FIRS.

Don't get me wrong, if I had underpaid or had an incorrect deduction, whatever, OK.  Then I owed it.  But how does one receive a penalty for underpaying when one gets a refund?

FIRS

I have never paid the quarterly estimates. That is as dumb as overpaying FIT so you get a big refund.

Fpni
Fuck the irs

Now aggressively go after the student loan default crowd.

This is technically just a fed rate increase and the IRS penalty is pegged to it.

So much.  Not good enough for them to get their pound of flesh every year - they want to f with us every quarter.

I self identify as already having paid my taxes. How dare you assume I didn't.

Onlyfans probably has better analytical tools that 90% of businesses.

Great.  There is no way in hell I can accurately estimate my income for the year.

The IRS hates productive people

The left hates the self-empmoyed.

Fucking corrupt public dependent parasites

This problem will be solved by the new 87,000 IRS agents Brandon wants.

We even have some IRS people in GD who support that.  

Your estimates are 110% of prior year tax payments

One of the greatest mysteries is how all this got built without taxing people's income

They want you to overestimate and overpay, then wait for them to give you back your own money without interest.

Yup.  They put the "anal" in analytical.

I did that and they STILL penalized me.  See my post above.  

I'm tax blind, so going to request a pass.

So lets pretend I am very stupid with money.

AND...

At the beginning of each quarter. I write a check to the IRS for $100,000.00 because I think that's what my taxes will be for each quarter.

my actual taxes are

$80,000 first quarter.
$120,000 second quarter.
$80,000 third quarter.
$75,000 fourth quarter.

I would have paid more in the year than I owed but because of my 2nd quarter underpayment I get fined.

Thats some stupid ass shit if its even close to something like this.

Years ago in another business I overestimated and paid more in the first three quarters than I owed for the whole year. So I didn’t pay my fourth payment.

I got fined, and a refund, in the same year.

I hate thieves.

They want you to hire a CPA to give you an EXACT number each quarter.  CPAs are in cahoots with the IRS to keep them all employed.

Flat tax is best tax.  Of course, 87% of all CPAs would lose their jobs.

This is likely tied to statutory interest - which yes, has been impacted by economic policy, but may not be a directed policy but a statutory response.

Same as judgments, awards etc use some statutory indicator.


https://www.irs.gov/newsroom/interest-rates-increase-for-the-fourth-quarter-2023

Looks like exactly that

I can assure you that three letter agencies such as the IRS, ATF, and FBI etc are not getting disbanded. Perhaps as the FBI expands its powers other three letter agencies will be absorbed by their tentacles.

They really hate small business owners or LLCs, or even people just selling used crap on ebay.

You have to make quarterly estimated payments by a certain date each quarter not to get penalized.  Thise payments need to be exactly, or more than, 1/4 of what you will end up owing at the end of the year.  Since it is impossible to know the future, you will have to overestimate your earnings by a safe margin in order to not get hit with a penalty.

Meanwhile that money is unavailable to you, but the IRS will not pay you interest on it.

Wrong.

The other agencies will just whine, "But the FBI got bigger, so why can't WE get bigger, too?"

And Brandon will say, "Sure.  Here's 87,000 new employees."

Pick up that 1099, citizen.

Wait til you find out about the Corporate Transparency Act.

Well, I'm not going to.

hush peasant

you dare question the King...

Irs shouldnt exist

I thought if you paid as an estimate 100% of last years tax payments you were okay as predicting future income can be difficult.

I use a CPA and let him figure it out.

Self employed here.  My income and expenses are vairable.  It is very difficult to estimate taxes.  I shoot for the 100% of the previous year.

Sometimes I feel like all I am doing is work to pay taxes, especially with the self employment tax.