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I Didn’t Pay Quarterly Taxes — How Do I Figure out the Penalty?

I Didn't Pay Quarterly Taxes — How Do I Figure out the Penalty? - TaxACT Blog

In the “You Got This” Weekly Series, we will answer a question from our customers found on FacebookTwitterTaxACT’s Blog and around the web.

Question:

I did my wife’s taxes for the first time this year and it turns out she/we should have been paying quarterly taxes and haven’t been. We owe about $750 in taxes.

From what I have read there is some kind of penalty and/or interest for missing those quarterly payments. How do I find out what that penalty is? Will the IRS just send us a letter after we file for what we owe in addition to what our return said?

Answer:

Any underpayment penalty is calculated based on your income, withholding, credits, etc. that you have entered.

TaxACT calculates this amount on Form 2210 (or Form 2210-F for farmers and fishermen).

Generally, you don’t have to pay an underpayment penalty if:

  1. You owe less than $1,000 in tax after subtracting withholding
  2. You paid at least 90% of your total tax through withholding and/or estimated tax payments; OR what you paid in tax for 2014 is equal to 100% of your 2013 taxes

Example 1:

Let’s walk through an example for the first exemption above.

If you are a filing as single, have zero dependents and your income is $40,000, your 2014 tax liability is $4,028.

If your employer withheld federal taxes from your income of at least $3,029, then you will not have an underpayment penalty.

If your tax liability is $4,028 and you pay $3,028 or less through withholding, you may have an underpayment penalty because you did not pay 90% of your total tax ($3,625) and your tax liability after payments and withholdings is $1,000 ($4,028-$3,028).

You can reduce your underpayment penalty by paying your amount due when filing your return by April 15. The earlier you pay and file, the smaller the penalty.

Another way to possibly reduce your penalty is if you received income unproportionally throughout the year. You can elect to use the annualized income method on Form 2210 to refigure your penalty based upon the income earned during each quarter.

Your penalty may be limited based on your prior year tax.

Example 2:

For the second exemption, let’s say your situation is same as Example 1 except your 2013 tax liability was $0. In this case, you would not have an underpayment penalty for 2014 due to your prior year tax liability amount.

On the other hand, let’s say your 2013 tax liability was $200. Then you would only need to have $200 withheld during 2014 to avoid the underpayment penalty.

How to avoid future underpayment penalties.

If you are an employee, you can withhold more federal taxes by submitting a new Form W-4 to your employer to avoid a future underpayment penalty.

You can also pay quarterly estimated tax payments directly to the IRS for the current tax year. This is especially important if you are self-employed as you do not have an employer to withhold your income for you.

TaxACT offers an easy interview to help calculate estimated taxes.

TaxAct Business maximizes all the deductions you are entitled to with a broad list of business expenses. It walks you through your taxes with easy interview questions. Start for free now or sign into your TaxAct Account.

Comments

  1. What is the penalty rate for not paying estimated tax payments. 0.5% per month? 5% per month? $1/day? 10%/day? For a lot of people, the significance of the penalty rate may determine whether to bother with the quarterly calculations/payments. Are the rates a secret that only the IRS knows? Why aren’t the rates posted anywhere I can find?

    • Hi Steven! The interest rates each year can be found on irs.gov and fluctuate by quarter. Here’s a quick breakdown of what’s been published so far this year (2016).
      First quarter – 3%
      Second quarter – 4%
      Third quarter – 4%
      The fourth quarter is TBD. Thank you!

  2. stan dekiel says:

    The question is ” how do I figure out the penalty?” not how do I know if I need to pay.
    What is the penalty for not paying estimated taxes?

    • The IRS figures out penalty amounts. If you have self-employed income or you have other income from which taxes weren’t withheld, the agency will take a few steps to determine the penalty amount you’ll owe. Those steps are: 1) The IRS will calculate how much tax you should have paid each quarter when you file your return. 2) The IRS applies a penalty rate to figure out how much your penalty is for each quarter. 3) The quarterly penalty amounts are added up to determine the total underpayment penalty amount you owe.

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