Internal Revenue Service or IRS is not kind enough for the workers who fail to pay taxes in full. So you must avoid any underpayment and penalty by all means. Let’s have a look on how you can avoid them.
Ideally you should know how much tax you should pay and how much have been withheld from your paycheck all through the year and the breakeven. But it hardly happens and as result you may wind up with unfortunate and unwanted situation of underpaying your tax and be penalized as well.
Whether you’re a self-employed or a salaried individual – it may happen to anybody. However, luckily, there are ways to get rid of tax underpayment and penalty. All you need to be careful about the amount of tax you owe, the amount you’re paying as well as withholding from your income.
When underpayment situation happens
It’s easy to be in a situation where you fail to pay required tax for a year. As a salaried worker, you can arrange to have your taxes withheld from your paycheck, if you claim wrong number of deserving allowances on your W-4, you may wind up in a scenario of underpayment. But at the same time, being a salaried person who has earned a lot from outside income, say through investment, during the year, you can also wind up underpaying taxes even if you’ve filled out W-4 properly.
The situation is even worse for the freelance worker and self-employed with varied income. As a non- salaried worker, your taxes can’t be withheld from your income. Rather you’ve to make estimated tax payments quarterly according to your income. If you’re a self-employed, you may face an underpayment penalty, in case you fail to evaluate the exact payable tax amount or unintentionally miss a payment.
Tips to avoid underpayment penalty
Underpaying taxes don’t always bring about an actual penalty. You can successfully avoid an underpayment penalty in the below-mentioned situations:
- You owe fewer than 1000 USD in taxes after deducting your withholdings and projected tax payments
- You didn’t have any tax liability during last year
- You’ve paid at least 90 percent of the total tax you owed for the present financial year or cent percent of what you’ve paid in taxes during last year – whichever is lesser
But the concluding rule works little bit differently for the higher-income people. If the amount of adjusted income for the last year is more than 150,000 USD as a married couple filing income tax jointly, or more than 75,000 USD as a single tax filer or a spouse filing individually, you need to pay 90 percent of existing year’s tax bill or 110 percent of the last year’s tax bill – whichever is lesser. You should also keep in mind that rules for underpayment penalties are entirely different for the fishermen and the farmers.
There’re always ways through which you can undo what you’ve done. Therefore, if you’re stuck with underpayment penalty during the current year, you can avoid it going forward. Being a salaried individual, you can initiate by escalating withholding on the W-4, so more tax can be taken out from each of your paychecks in due course. Being a salaried employee with a lot of extra income, you can make projected tax payments to cover the bases.
Being a self-employed, make sure you make necessary tax payments for the present financial year by the mentioned deadlines:
- 18th April, 2017
- 15th June, 2017
- 15th September, 2017
- 16th January, 2018
If you’re unsure about the tax amount to be paid each quarter, you may contact IRS to figure it out.
How to get underpayment penalty waived
It’s always recommended to avoid such a penalty. But if you somehow miss to make necessary payment, IRS offers some useful ways to waive your penalty. But it’s applicable only for the following situations:
- You faced a disaster or a casualty
- You retired after 62 or became disabled during the year for which you should have made estimated tax payment
Under any of such situations, underpayment would be considered to be unintentional as opposed to obvious negligence. If you face an underpayment penalty, you can use IRS form to calculate. However, the IRS will keep sending you bills to let you know the owed amount. Remember that managing to avoid underpayment penalty doesn’t mean that you don’t owe the tax. If you file tax return and see that you’ve underpaid, you must give IRS the money immediately to avoid another different set of penalties. So be aware of the tax situations and this is the only way to avoid paying unwanted underpayment penalties.