How Can I Avoid IRS Penalties for Underpayment of Taxes?

Failing to pay enough taxes throughout the year can lead to IRS penalties. Understanding estimated tax requirements and tax withholding strategies can help avoid unexpected fines.

1. Who Needs to Pay Estimated Taxes?

You may need to make quarterly estimated tax payments if you expect to owe more than $1,000 in taxes after withholding. This applies to:

• Freelancers and independent contractors.

• Business owners.

• Investors with significant capital gains or dividends.

2. Safe Harbor Rule to Avoid Penalties

You can avoid penalties if you:

• Pay at least 90% of your current-year tax liability.

• Pay 100% of last year’s tax liability (110% if AGI exceeds $150,000).

3. Adjust Tax Withholding

Employees can adjust Form W-4 to increase withholding and avoid penalties. Retirees with pension or Social Security income can also adjust withholdings using Form W-4V.

4. Making Estimated Tax Payments

• Use IRS Form 1040-ES to calculate estimated taxes.

• Make payments quarterly (April 15, June 15, Sept. 15, and Jan. 15).

5. What Happens If You Underpay?

The IRS may charge an underpayment penalty based on how much you owe and the length of time it remains unpaid.

Final Thoughts: Staying proactive with estimated tax payments and withholding adjustments helps avoid IRS penalties. Need assistance calculating your payments? Our tax experts can guide you.

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