Avoid Estimated Tax Penalties

With the April 15, 2024, deadline rapidly approaching, it’s crucial to address your estimated tax payments now to avoid unnecessary penalties and interest. The United States operates on a “pay as you go” tax system, requiring taxpayers to pay income taxes as they earn or receive income throughout the year.

Why is this urgent? The current penalty rate for underpayment is at a staggering 8% — the highest we've seen in 17 years. This rate applies to the amount underpaid each quarter, and since it's not deductible, the actual cost could significantly exceed 8%.

Here’s what you need to know:

• Employees with taxes withheld by their employers typically don’t face this issue.
• Self-employed individuals, on the other hand, along with those receiving income not subject to withholding (e.g., retirement distributions, dividends, capital gains), must be vigilant.
• C corporations are not exempt from these penalties either.

Avoiding the penalty is straightforward. Individuals must pay either 90% of the total tax due for the current year or 100% of the total tax from the previous year (110% for those with higher incomes). Corporations should aim to pay 100% of the tax shown on their current or preceding year's return.

Most manage this through equal quarterly payments, but remember, the IRS assesses penalties for each period independently. Overpaying in one quarter won’t offset underpayments in another.

If you’re concerned about how this affects you or wish to discuss your estimated taxes and avoid these penalties, don’t hesitate to get in touch. Visit our Calendar to schedule a consultation. Let’s ensure you’re fully prepared before the deadline.