As of October 1, the IRS has increased the interest rate on estimated tax underpayments from 3% to a staggering 8%. This shift has significant implications, potentially leading to costly surprises for those who fall short on their tax payments.
Key Points:
Interest Rate Surge: The IRS penalty for underpaying taxes has spiked to 8%, a notable increase from the 3% rate just two years ago. This change is a direct result of rising interest rates, impacting taxpayers who fail to keep up with their tax obligations.
Gig Workers and Consultants at Risk: This hike in penalties particularly affects gig workers and consultants who lack tax withholding and often plan to settle their taxes in April. However, even individuals with regular paychecks and tax withholding may be vulnerable if additional income calculations go awry.
Total Tax Bills on the Rise: Beyond underpayment penalties, the overall tax bills for millions of Americans are increasing, heightening the risk of individuals being unable to cover their full balance come April. This situation can lead to additional penalties and, in extreme cases, IRS collection actions such as liens and levies.
Stay Proactive to Avoid Pitfalls: The U.S. tax system operates on a pay-as-you-go basis, emphasizing the need for regular payments throughout the year. To sidestep underpayment penalties, most filers must pay 90% of their taxes through withholding or quarterly estimated payments. It's crucial for individuals, especially those with fluctuating or self-employment income, to stay on top of their estimates and adjust strategies accordingly.
Adjusting Strategies for Income Variability: Individuals experiencing fluctuating income, such as those in gig work, should carefully tailor their tax payment strategies. A thoughtful approach involves toggling between paying 90% of the current-year tax bill and 100% or 110% of the previous year's tax bill based on income fluctuations. This adaptive method helps avoid unnecessary overpayments or underpayments, ensuring a balanced tax approach.
Unsure if you will owe for 2023? Use the IRS tax-withholding estimator, taxpayers need to plug in information from their last year’s tax return, pay stubs and all other income, including side gigs, investments and retirement account payouts.
Conclusion:
As we approach year-end, the surge in underpayment penalties serves as a cautionary tale for individuals to assess their current standing and make necessary adjustments. Whether you're a gig worker, consultant, or someone with varying income, understanding and meeting your tax obligations is vital. For personalized guidance and assistance in navigating these changes, consider reaching out to Mark Sullivan Consulting. Ensure your financial well-being by partnering with experts who can help you navigate the evolving tax landscape. Stay informed, plan ahead, and avoid the pitfalls that could result in unexpected financial burdens.
About the author
Mark W. Sullivan, EA, the founder of Sullivan Consulting, established the firm's roots in St. Louis, MO, in 1998. In 2020, he made a strategic move to the thriving business environment of Arizona. Mark specializes in the intricate realm of federal tax controversy representation, appeals, and consulting, catering not only to individuals and businesses but also extending his expertise to renowned law and accounting firms nationwide.
Mark's distinguished career includes serving as a consulting and expert witness in a multitude of civil and criminal cases, spanning several federal district courts. His credentials are underscored by an unlimited Enrolled Agents license, a testament to his exceptional knowledge and unwavering commitment to his craft. His recognition by the Internal Revenue Service for admission to practice is grounded in his extensive background as a Revenue Officer, having worked in demanding locations such as New York, NY, St. Louis, MO, and Washington, D.C.
Mark's extensive experience as a Revenue Officer has uniquely positioned him to navigate the intricate landscape of federal tax matters. Now, based in Scottsdale, AZ, Mark continues to offer his expertise to clients across the nation, ensuring that their interests are diligently and professionally represented.
Disclaimer: This article is for information purposes only and cannot be cited as precedent or relied upon in a tax dispute before the IRS.
Copyright 2023 Mark Sullivan Consulting, PLLC
Ashlea Ebeling, The Wallstreet Journal (12/2/23)