All year, you’ve been meaning to check whether your tax withholding and estimated payments will cover your tax liability. But 2017 has been super busy. It’s mid-November, and you’re just getting around to it. Is it too late to reduce or avoid tax penalties if you owe? Maybe not…
To avoid a penalty for 2017, tax withholdings or estimates must total 90% of your 2017 tax liability, or 100% of your 2016 tax liability, whichever is lower. Wage earners usually have taxes withheld from their pay throughout the year. Self-employed individuals and wage earners with a side gig need to make estimated tax payments.
Since 2010, the IRS has seen an increase in the number of taxpayers assessed underpayment penalties and interest, up 40% from 7.2 million a year to 10 million. Interest on unpaid amounts is calculated based on IRS rates, and accrues daily until the amount due is paid. That can really add up!
Here are four ways to avoid being one of those statistics:
- Increase tax withholdings from wages for the rest of the year by submitting a new IRS Form W-4 and a new state withholding authorization with your employer. Reducing the number of exemptions that you claim increases the amount of tax withheld. Don’t overdo it! Avoid over withholding and giving Uncle Sam an interest-free loan until you get your 2017 refund.
- Pay estimated tax for 2017 if you expect to owe at least $1,000, after tax withholdings and refundable credits. Estimated tax payments are normally due on April 15, June 15, September 15and January 15 of the following year, unless the due date falls on a weekend or holiday. Paying amounts due in advance of the fourth quarter payment deadline on January 16, 2018, will stop the clock on 2017 interest accruals.
- Taxpayers who receive income unevenly during the year can make estimated tax payments as funds are earned or received. That means if most of your income comes in during the last few months of the year, you can make lower estimated tax payments earlier in the year and higher payment amounts later in the year.
- Exceptions to the penalty and special rules apply to some groups of taxpayers, such as farmers, fishermen, casualty and disaster victims, those who recently became disabled or retired.
Think that the IRS loves to charge penalties? No! They want to help taxpayers avoid penalties. To raise awareness, the IRS recently launched a new “Pay as You Go, So You Don’t Owe” web page, with tips and resources designed to help taxpayers. Portions of the site focus on self-employed taxpayers, including those with side gigs. The sharing economy page explains tax withholding and estimated tax payments to reduce or avoid tax penalties.