According to information published in the IRS’ Data Book for 2016, the number of taxpayers being penalized for underpaying estimated taxes has increased by nearly 33% from almost 7.5 million to 10 million filers between fiscal years 2007 and 2016. The total assessments for fiscal year 2015 were approximately $1.3 billion.
Although there are many reasons why a taxpayer may underpay the amount due in estimated taxes, it is important for filers to consider all sources of income for tax purposes. This includes wages earned from being employed by a company, as well as income earned from freelancing, selling goods or services online, having a side business, and other sources such as Uber or Airbnb.
Just because your employer takes money out of your paycheck to pay federal and state income taxes, it does not mean that it is enough to cover your annual tax obligation. Depending on your situation, increasing the withholding or adjusting the number of allowances claimed may help.
People working solely in the “gig economy” typically have to pay estimated taxes. These non-wage earners (not employed by a company but earning income) must pay quarterly taxes on income earned of $1,000 or more, less refundable credits. Non-wage earners should submit quarterly payments for at least 90% of the estimated tax due on income in a taxable year. If you are married and filing jointly and your spouse is employed, he or she can adjust withholdings to cover some or all of your estimated taxes.
Taxpayers may qualify for an exception to avoid underpayment penalties. These include people who base estimated tax payments on their prior year’s tax and uneven flows of income throughout the year. Filers who recently retired or became disabled, as well as casualty and disaster victims generally qualify for an exception. Farmers and fishers may also qualify.
The annualized income installment method of estimating taxes can typically be used to avoid paying a penalty if you received all of your income late in the year and make a fourth quarter payment to cover estimated taxes for that fiscal year.
Nearly 145,000 taxpayers benefited from tax abatements in 2015 in the amount of $118 million. Tax abatement programs cut or temporarily ease tax burdens on individual taxpayers, small businesses, or other parties taxed by the federal or state government.
No one likes to pay estimated taxes. Even so, paying a penalty for underpaying is even worse. It is important that you make your accountant aware of all of your income so that the amount due in estimated taxes is calculated correctly. Please contact me if you have questions at 610-828-1900 or
. I would be happy to discuss your situation and help you determine how much money you should pay in estimated taxes.