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How Can Paying Taxes On Time Can Help One Avoid Penalties?

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How Can Paying Taxes On Time Can Help One Avoid Penalties?

It is very common in the U.S. that around mid-April, you’ll hear people of all ages talk about ‘Tax Day.’ It is because all the income tax forms are due around that time.

But have you ever questioned yourself as to why we should pay taxes? How can paying tax payments benefit us! Now is the time to know about the IRS underpayment penalty system. 

Tax payment comes in many forms. Be it property tax, sales tax, or your tax returns! When you make money through a job, you have to pay income taxes. Obviously, it has certain restrictions and will depend on how much money you make.

If you qualify for the tax payment, a certain percentage of the money that you make is withheld and sent to the government. Another form of tax payment is the sales tax.

When you buy things at a store, you have to pay sales tax, which is a percentage of the cost of the item charged by the store.

Paying taxes on time is every individual’s duty and also a requirement of the law too. However, if you don’t pay your taxes on time, a penalty might occur for the amount that you haven’t paid throughout the year.

Whether you file your taxes or not, you owe the government money, and the government expects to be paid on time, meaning failure to pay taxes can result in penalties.   

What exactly is an underpayment penalty?  

It doesn’t matter if you work as a freelancer or you are a salaried employee; you have to pay taxes based on your income. The IRS will send you a notice for what you owe if you fail to pay taxes on time.

Failing to pay the amount by the date they are due will result in daily and monthly penalties. It is easy to avoid paying an IRS underpayment penalty if : 

  • After calculating the withholding amount, you owe less than $1000 in tax.   
  • In order to avoid an underpayment penalty, individuals must pay either 100% of last year’s tax or 90% of this year’s tax by combining estimated and withholding taxes.   

However, it is even possible that a taxpayer is not even aware of the underpayment amount and only finds out during tax filing season when it is too late. The IRS charges the taxpayer an underpayment penalty toward their tax obligation throughout the year.  

How does the IRS underpayment penalty work?  

Underpayment penalties do not apply to every individual. In the first place, you must plan to avoid it. An individual must pay either 100% of last year’s tax or 90% of this year’s tax in order to avoid underpayment penalties.

The underpayment penalty is owed when a taxpayer underpays the estimated taxes or makes uneven payments during the tax year that result in a net underpayment. 

Take an IRS form 2210 and calculate the total amount of taxes that you owe. You will get a clear estimate of the amount that you have already paid in estimated taxes throughout the year.

A penalty will be charged to the taxpayer in case he fails to make the payment on time. The penalty is calculated on the total outstanding amount and for how long the amount has been overdue.

The percentage rate of penalty is not static. It depends on several factors, including the total underpayment amount and the time period in which taxes were underpaid.  

How do calculate underpayment penalties? 

If you file your taxes and find that you paid less than what you owed, you owe an underpayment penalty. Form 2210 will help you to determine the underpayment amount.

It can get tricky sometimes while calculating the underpayment penalty because, unlike any other IRS penalties, it’s not a standard percentage amount. Its percentage is based on-  

  • The underpayment amount which you owe,   
  • The total time period from when the underpayment was due,  
  • The rate of interest on the total underpayment amount is determined by the IRS every quarter.  

Along with the penalty, tax underpayments may also lead to charging interest as well. The interest rate is set by the IRS every quarter by determining the federal short-term rate for the quarter and then adding 3% to that percentage rate.

It is always advisable to pay your taxes on time in order to avoid paying penalties and interest.  

Exception of estimated tax penalty

Every rule has exceptions. Likewise, there are also certain conditions under which a taxpayer may qualify for an exception, and it might help them to avoid the underpayment penalty.

It means that the IRS will not assess a penalty for underpayment of estimated tax if certain exceptions apply. You may qualify for an exception to the penalty if you-  

  • Owe a total tax liability of less than $1000,   
  • Have no tax liability during the prior year as a U.S citizen,  
  • Are going through unforeseen circumstances such as any natural disaster,  
  • A taxpayer retired after reaching the age of 62, during the prior or current tax year,  
  • Any other situation where the underpayment was the result of a reasonable cause and not due to willful neglect.   

Get the required help for underpayment penalties

One must pay taxes as it is the duty of each and every individual to pay taxes on time. Tax payments help in the betterment of the country and make the economic condition quite strong.

However, determining the IRS underpayment penalty is very risky. To make things easy in understanding the complex tax policy, you can contact FlyFin. They are a one-stop solution for all your tax-related problems.

Also, the services are very affordable and will not burn your pocket! Your tax filing gets easy whenever a professional files your taxes. They will give you the complete information if you have underpaid or not or whether there is a need for a penalty.

Let them handle all your tax problems, and you can calmly and freely focus on your other important work. For any queries, feel free to call them.