Most folks pay the bulk of their income taxes through withholding from their paychecks. Others, though, pay it through estimated quarterly payments. If this is you, then you’ve probably been getting hammered lately. And not the good kind, with tasty beverages.
Here are Five Fast Facts on avoiding interest penalties on quarterly payments:
- 🎯 Who Gets Hit? - We’re talking about folks who are self-employed, retirees, investors, business owners, and gig workers, just to name a few. Basically, anyone who doesn’t have income tax withheld from their paycheck by an employer.
- 📈 Going Up - The average penalty for 2023 rose to about $500 (from $150 in 2022). The IRS issued about $7 billion total in estimated tax penalties, up from about $1.8 billion in 2022. About 14 million workers were impacted, up from 12 million last year. Is anyone else bothered by the fact that the IRS seems to be getting greedy?
- 🤦 Of Course, It’s The Interest Rate - One of the biggest causes is interest rates. In 2021, the IRS rate on underpaid taxes was 3%. In 2022 it rose to 6%, and in 2023 it kept going up to 8%, where it still is now. So yeah, you’re getting zapped harder than a mosquito who gets too close to that beautiful purple light.
- 💡 A Loophole - One legal loophole you might be able to use is to leverage the fact that withholding any time of year counts as being distributed throughout the year. So, if you withhold a big chunk in December, it’s applied as if you did it for Q1, Q2, and Q3, as well. It’s like magic for accountants!
- 👀 Not To Be Left Out - Don’t forget about state income tax! The biggest chunk is federal, of course, but states want their cut, too. Some states don’t penalize underpayments, but some do. Make sure you know the situation where you live, as some states may operate similarly to the federal government. Boooo!
🔥Bottom line: Get with a tax professional to strategize on how you should handle this. Just know that this is going to keep stinging for a while, until interest rates go down.
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