If your only income is from self-employment and you anticipate paying at least $1,000 in income/self-employment taxes, then you must pay the estimated tax (1). If you haven’t passed any of the above “safe harbor” tests, you will need to make estimated tax payments throughout the year to potentially avoid an underpayment tax penalty. This means entrepreneurs must crunch the numbers and see how their income and expenses will measure up, as well as figure out what they'll owe Uncle Sam. Here is more information on each of the options to avoid paying a penalty for not paying your taxes in full. In this article we’ll discuss how to make your estimated tax payments to ensure you avoid the IRS underpayment penalty. Tim is a certified public accountant (CPA) and long-time, full-time RVer. IRS Publication 505: Tax Withholding and Estimated Tax, IRS Form 1040-ES: Estimated Tax for Individuals, IRS Form 2210: Underpayment of Estimated Tax by Individuals, Estates, and Trusts. How do you avoid the penalty for underpayment of estimated taxes? If your income increased substantially in the current calendar year and you did pay 100% of the amount you owed last year, you may be able to avoid the underpayment penalty. The IRS applies a percentage (the penalty rate) to figure your penalty amount for each quarter. The underpayment penalty is avoidable, but does require careful planning at the beginning of your tax year. In general, you may avoid the underpayment penalty if the combined total of your tax withholding and timely estimated tax payments for the current tax year will be at least: 100% of your prior year’s total tax burden, or, 90% of your total tax burden for the current tax year (2) The penalty amount for each quarter is totaled to come up with the underpayment penalty you owe. The standard penalty is 3.398% of your underpayment, but it gets reduced slightly if you pay up before April 15. The best way to avoid the penalty for underpayment of estimated taxes? TIP: An easy way to meet the Safe Harbor is to divide your prior year’s total tax burden by 4 and use these amounts for your estimated payments for the current tax year. The penalty rate for the underpayment of estimated taxes may differ from year to year, and the amount of your penalty depends on your particular circumstances. For the 2017 tax year, the four periods and corresponding deadlines are: Your estimated tax payment obligation begins in the “payment period” that you first earned income. "Sometimes we have independent contractors or people who work in real estate and work on commission, and they get a big year-end bonus or close a big deal close to year-end," said Neuhoff. 100% of your prior year’s total tax burden, or, 90% of your total tax burden for the current tax year (2), First period: Jan 1 – March 31, estimated tax payment due April 18, Second period: April 1 – May 31, estimated tax payment due June 15, Third period: June 1 – August 31, estimated tax payment due Sep 15, Fourth period: Sep 1 – Dec 31, estimated tax payment due Jan 16, 2018. Making the appropriate tax payments over the course of the year can be the difference between getting a refund or owing the IRS taxes and penalties. After the tax year concludes and you are using actual figures to complete your tax return, use IRS Form 2210 and Publication 505 Chapter 4 to determine if you successfully avoided the underpayment penalty (3). People who pay their taxes on a quarterly basis have until Jan. 15 to give the IRS their final payment for 2019. Some taxpayers were unable to pay the appropriate amount of tax during 2018, the first year under the Tax Cuts and Jobs Act. The tax liability on gross income after deducting Maryland withholding is $500 or less, or, B. You can make this change by providing your employer with a revised Form CT-W4 or Form CT-W4P . Your fourth-quarter estimate should consider this tax liability. We calculate the penalty on the unpaid amount from the due date of the estimated tax installment to the following dates (whichever is earlier): The date we receive your payment; The due date of your business return We want to hear from you. On three different occasions, he has also started his own small businesses from scratch. IRS Form 1040-ES provides instructions for how to calculate your required annual payment necessary to avoid the underpayment penalty. More from Personal Finance:This Democratic candidate is proposing a 44% taxYou don't know about this retirement savings blind spotABLE accounts let the disabled plan and save big. The change to the tax code lowered individual income rates, nearly doubled the standard deduction and eliminated personal exemptions. His depth of experience, in both self-employment and operating small businesses, combined with his intimate familiarity with the needs of RVers, makes Tim a great resource for helping fellow RVers navigate the potential difficulties of working while traveling. How to appeal a penalty. Completing this form will confirm if you’ve met any of the safe harbors noted above. Therefore, we strongly encourage you to seek the advice of a professional to help you with your specific needs. Everybody’s situation is unique so connect with a seasoned tax advisor if you prefer a helping hand to navigate these waters and avoid the gotchas. 5% of unpaid tax required to be reported 2. You also can have your underpayment penalty waived if you reached age 62 and retired or became disabled in the current tax year or previous year and you met the following 2 conditions: If you are audited, you may submit a request for a waiver of penalties to the auditor. Profitability & Growth Advisor / If you don’t qualify for the 80% waiver, the next step is to look back at your tax … However, there is an important difference. While the IRS waived penalties for people who fell short of their tax liability on their 2018 tax return, it's not likely to be as forgiving this time around. Form Number: 221. The Internal Revenue Service's offices in Washington, D.C. lowered the 90% tax threshold to 85% and then 80%. To avoid underpayment penalties, you can pay at least 90% of estimated taxes for the current year or 100% of the taxes paid in the prior year. Ewing CPA LLC IRS Form 2210 and Publication 505 Chapter 4 are used after the year is complete when you are preparing your tax return. Make sure you pay enough in taxes year-round. The former does. Note, the rule of thumb to determine who must pay estimated tax (see Part 1 of this article) uses a similar 100%/90% calculation as the Safe Harbor rules for the underpayment penalty.