The penalty for tax underpayments has skyrocketed since 2021, posing a significant threat to gig economy workers and consultants. As of Oct. 1, the IRS will now charge 8% interest on estimated tax underpayments, a significant increase from the previous 3%, according to The Wall Street Journal. This change predominantly affects pay-as-you-go workers who do not have taxes withheld, resulting in them failing to make estimated quarterly payments before filing their taxes in April.
Karla Dennis, an enrolled agent from La Palma, Calif., emphasized that even taxpayers who have taxes withheld may still face the higher penalty if they fail to accurately calculate and pay taxes on additional income. Changing withholding to receive more weekly cash can further exacerbate the issue, making it crucial for individuals to plan their finances carefully.
The increased penalty is a result of the IRS collecting $1.8 billion in underpayment penalties from approximately 12.2 million Americans in fiscal year 2022. However, taxpayers can avoid fines by paying at least 90% of their tax bill before filing, or ensuring that the difference is less than $1,000. Another option is to pay 100% of the previous year’s tax bill, or 110% for high-earning individuals and married taxpayers who file separately.
Joseph Doerrer, a certified financial planner, warns individuals to reconsider their financial situation as the year-end approaches to avoid penalties. A cautionary tale is shared by Sameet Durg, a marketing executive from Warren, NJ, who learned the hard way after facing a four-figure underpayment penalty on top of an already significant tax bill due to his failure to make estimated payments. Being blindsided by taxes prompted him to proactively manage his finances throughout the year.
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