IRS Penalties • Planning Tips

How to Avoid the IRS Estimated Tax Penalty

The U.S. uses a pay-as-you-go tax system, meaning you must pay income taxes throughout the year as income is earned—whether through withholding, estimated tax payments, or both.

What Is the Estimated Tax Penalty?

You incur this penalty if you fail to pay enough tax during the year. The IRS charges a non-deductible interest penalty on the amount you underpaid each quarter. Since the rate equals the short-term interest rate + 3%, it currently sits at 8% — the highest in 17 years.

Who Needs to Worry About This Penalty?

Even though employees often avoid it through withholding, many taxpayers are at risk, including:

• Self-employed individuals

• Anyone with income not subject to withholding

• Investors receiving dividends, interest, or capital gains

• Rental property owners

• Retirees receiving distributions

• C corporations (also subject to underpayment penalties)

Two Simple Ways to Avoid the Penalty

All individuals can avoid the penalty by meeting one of the IRS safe harbor rules:

• Pay 90% of the current year’s tax liability, OR

• Pay 100% of the prior year’s total tax (or 110% if AGI exceeds $150,000, or $75,000 if MFS).

Corporations must pay 100% of the tax shown for the current or prior year (but large corporations may not use the prior year rule).

Important: The IRS calculates the penalty by quarter. You can’t make up for an underpayment in an earlier quarter by paying extra later.

Alternate Calculation Methods

Some individuals and corporations qualify for alternate methods such as the annualized income method, which can reduce penalties for uneven income. However, these methods can be complex.

Avoid Penalties with Smart Tax Planning

Estimated taxes can feel overwhelming—but with planning, you can eliminate unnecessary penalties and keep more of your hard-earned money.

Learn More: https://www.tandyconsulting.com/quarterly-estimated-taxes-landing/