Each year, the Internal Revenue Service assesses estimated tax penalties against millions of taxpayers. This added money typically is due the IRS when a taxpayer pays too little total tax during the year. The last time the IRS released complete estimated tax penalty data was three years ago. The federal tax agency said back then that the average estimated tax penalty, which is based on the interest rate charged by the IRS on unpaid tax, was about $130. Back in September 2015, the IRS said it was seeing more taxpayers run into the estimated tax penalty. The number jumped about 40 percent from 7.2 million in 2010 to 10 million in 2015. Both the amount of the average estimated tax penalty and the number of folks who have to pay it could be even bigger now, thanks in part to the Tax Cuts and Jobs Act (TCJA) changes to the tax code. What's subject to estimated tax: The IRS has been encouraging all taxpayers who have income that isn't subject to withholding — that includes investors, folks with sharing economy side jobs, full-time self-employed individuals and retirees living off pensions — to do a paycheck check-up using the tax agency's TCJA-updated online withholding calculator. When you're entering earning into the online calculator, don't forget about that couple of hundred from a state lottery scratch off, those sports that paid off or the nice chunk of change you got from renting out your lake house over the summer. Those are taxable, too. In these earnings cases, instead of telling an employer to change a workplace withholding amount, you need to account for the calculator's suggested adjustments via estimated tax payments. Four equal payments expected: As the table below shows, the IRS expects you to take out the amount he should get and send it to him in equal installments four times a year. The estimated tax periods are:
The estimated deadlines follow the same IRS rules as annual filings. That means if you snail mail in a payment with the IRS Form 1040-ES, a postmark of the due date qualifies the payment as being timely filed. You also have all day on the due date to electronically pay your estimated tax bill. And when the estimated deadline falls on a Saturday, Sunday or legal holiday, you have until the next business day to make the payment. My earlier post has the scoop on paying estimated taxes. But since we're talking tax penalties today, below is a look at the three estimated tax safe harbors that can protect those of us trying to navigate treacherous tax waters of these additional payments.
Penalties per pay period: While making late-year W-4 adjustments to increase your (or your spouse's) withholding is OK to meet your eventual tax liability, the same tweaking isn't true with estimated tax amounts. If you think the IRS will let you slide by if you miss one 1040-ES payment and simply add that amount to the next payment or you pay all you owe in one estimated tax payment (typically the fourth one) or you make three small estimated payments and one dramatically larger one (again, typically the fourth one), think again. Sure, Uncle Sam is glad you did pay all you owed. But since the estimate tax process follows the overall U.S. U.S. tax system's pay-as-you-earn approach. That means the estimated tax penalty still applies for each period in which a payment is due. Forgiven penalties: Although Uncle Sam's tax collector can seem heartless when it comes to getting ahold of your money, the IRS can waive the estimated tax penalty in certain situations. Some of the more common reasons for IRS estimated tax penalty relief are:
Farmers and fishermen also must pay estimated tax, but they face different requirements. IRS Publication 505 has more information about these professions' special estimated tax rules. Finally, all y'all who live in states with income taxes, don't forget about those jurisdictions' estimated tax requirements. The key to paying your estimated taxes is like every other tax situation. Understand your financial and tax circumstances, look at the law and your options, and use the method that works best for you. A version of this post originally appeared on the ol' blog on Sept. 14, 2015, and was updated on Nov. 1, 2017. You also might find these items of interest:
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