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Tips to Avoid an Underpayment of Estimated Tax Bill

What Are Estimated Taxes and Who Must Pay Them?

According to the Internal Revenue Service (IRS), estimated tax is “a method of paying tax on income that is not subject to withholding tax. This type of tax can include income from self-employment, business earnings, interest, rent, dividends, and other sources.”

The IRS states that estimated taxes are required to be paid every quarter, usually in four equal installments. If an individual overpays on their estimated taxes, they will receive the excess amount back from the IRS as a tax refund, similar to how refunds are handled in normal tax situations.

Underpayment of an estimated IRS tax billThe following individuals and entities are required by the IRS to make estimated tax payments:

  • Self-Employed Persons or Sole Proprietor Business Owners. Those who have income from their own business will need to make estimated tax payments if their tax liability is expected to be more than $1,000 for the year. This classification includes both part-time and full-time enterprises.
  • Partners, Corporations, and S Corporation Shareholders. Business ownership earnings usually will require estimated tax payments. Corporations must make estimated tax payments if it is expected to have at least $500 in tax liability.
  • People Who Owed Taxes for the Prior Year. If you owed taxes at the end of last year, it probably means you had too little withheld from your paychecks, or you had other income that increased your tax liability. This is a flag to the IRS that you should be making estimated tax payments.

Underpayment Penalties

The IRS may charge taxpayers a penalty for underpayment of estimated taxes for a variety of reasons. The two most common reasons for an underpayment of estimated tax penalty are if an individual or entity does not make any estimated tax payments during the Couse of the year or if the amount withheld is less than 90-percent of the estimated tax bill.

Getting Underpayment Penalties Waived

Underpayment of estimated taxes doesn’t always result in a penalty, however. For those subject to a penalty, they may fill our IRS Form 2210 to have their penalty reduced or have it removed. Federal laws authorize the IRS to waive the penalty if:

  1. You didn’t make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  2. You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.

Generally, individuals can also avoid an underpayment penalty if they meet any of the following exceptions:

  • The total of your withholding and estimated quarterly tax payments was at least as much as your prior-year tax bill.
  • You had no tax liability last year, and you were a U.S. citizen or resident alien for the entire year.
  • You owed tax last year and had that amount or more withheld from your paycheck this year. However, if your adjusted gross income was more than $150,000 (or $75,000 if married and filing separately), you must pay at least 110% of last year’s tax bill.
  • You had at least 90-percent of this year’s tax withheld from your paychecks.
  • The amount owed this year is higher than your withholding by no more than $1,000.
  • You didn’t have any withholding taxes, and your tax bill is less than $1,000.

Contact an Experienced Tax Attorney Today

If you are facing penalties from the IRS, you need the help of an experienced tax law firm. At Ayar Law, we represent people and business with state and federal tax problems that require creative solutions. We focus entirely on tax problem resolutions and giving our clients a fresh start. We strive to get you the best solution for your situation. So, if you’re having tax troubles call Ayar Law today at (248) 262-3400 for a free, no-obligation consultation.