To avoid penalties and interest with the IRS, you must make your estimated tax payments on time and for the correct amount. Here are the general rules for avoiding penalties and interest through estimated payments:
Make your estimated tax payments on time
To avoid penalties and interest, you must make your estimated tax payments on time. The due dates for estimated tax payments are April 15th, June 15th, September 15th, and January 15th of the following year. If the due date falls on a weekend or holiday, the due date is extended to the next business day.
It’s important to note that each estimated tax payment is due in full on the due date. You cannot make partial payments or spread your payments out over the year. If you miss a payment or make a late payment, you may be subject to penalties and interest.
Pay the correct amount
To avoid penalties and interest, you must pay the correct amount of estimated taxes. The amount of your estimated tax payments should be based on your estimated tax liability for the year. You can use the IRS Form 1040-ES to calculate your estimated tax liability.
If you underpay your estimated taxes, you may be subject to penalties and interest. The penalty for underpayment of estimated taxes is calculated based on the amount of tax that you underpaid and the length of time that the underpayment occurred. The interest rate for underpayment of estimated taxes is the federal short-term rate plus 3 percentage points.
To avoid underpaying your estimated taxes, it’s important to update your estimated tax payments throughout the year if your income or expenses change. You can recalculate your estimated tax payments using the IRS Form 1040-ES or work with a tax professional to help you estimate your taxes.
Meet the safe harbor rules
The safe harbor rules allow you to avoid penalties for underpayment of estimated taxes if you meet certain criteria. There are two safe harbor rules:
a. 90% of current year tax liability
You can avoid penalties if you pay at least 90% of your current year tax liability through estimated tax payments. Your current year tax liability is your total tax liability for the year, minus any credits and withholding.
b. 100% of previous year tax liability
You can also avoid penalties if you pay at least 100% of your previous year tax liability through estimated tax payments. If your adjusted gross income (AGI) for the previous year was more than $150,000 ($75,000 if married filing separately), you must pay 110% of your previous year tax liability to meet this safe harbor rule.
It’s important to note that if your income changes significantly from one year to the next, using the 100% of previous year tax liability safe harbor rule may not be the best option for you. You may want to recalculate your estimated tax payments using the IRS Form 1040-ES or work with a tax professional to help you estimate your taxes.
In conclusion, making estimated tax payments is an important part of being a self-employed individual. To avoid penalties and interest with the IRS, you must make your estimated tax payments on time and for the correct amount. You can use the safe harbor rules to help you avoid penalties, but it’s important to recalculate your estimated tax payments throughout the year if your income or expenses change. Working with a tax professional can help you stay on track with your estimated tax payments and avoid penalties and interest.
The above is not intended to be read as tax advice and the herein is based on the facts provided to us through the IRS and their publications at the time of writing without the intention to include every individual situation. Tax law is subject to continual change, at times on a retroactive basis and may result in incremental taxes, interest or penalties. Should the facts provided to us be incorrect or incomplete or should the law or its interpretation change, our advice may be inappropriate. We are not responsible for updating our advice for changes in law or interpretation after the date hereof. We advise every individual reading this advice to directly contact a professional with expertise in taxation or the area of importance that they intend to use the information for.
