IRS Raises Underpayment Penalty to 8%: What Gig Workers Need to Know
The IRS Penalty for Underpayments Triples to 8% – Gig Workers and Consultants Beware!
In a surprising turn of events, the Internal Revenue Service (IRS) has significantly increased its penalty for tax underpayments, soaring from 3% just two years ago to a whopping 8% as of October 1, 2023. This hike in the interest penalty has caught many gig economy workers, consultants, and independent contractors off guard, putting them at risk of hefty payments to Uncle Sam in next spring’s 2024 tax filing season.
Why the IRS Penalty for Underpayments Matters to Gig Workers
The IRS’s decision to raise the underpayment penalty has a substantial impact on self-employed workers, including gig workers, who often rely on a pay-as-you-go approach and do not have taxes withheld from their earnings. This penalty comes into play when these individuals fail to make estimated quarterly tax payments before filing their taxes in April.
Previously, taxpayers faced a 3% interest penalty for underpayment, but now they must grapple with an 8% interest charge. This rate is calculated every quarter and is set at the federal short-term rate plus three percentage points for non-corporate taxpayers.
However, there is some relief for those whose tax underpayment is under $1,000 after accounting for credits and other tax-related factors.
Tips to Avoid the IRS Underpayment Penalty
To steer clear of the IRS underpayment penalty, gig workers and self-employed individuals should consider the following tips:
- Stay Informed: Keep tabs on your earnings and tax obligations throughout the year, rather than waiting until tax season.
- Use IRS Tools: The IRS provides a tax-withholding estimator tool that helps you calculate your tax liability accurately. Input information from your previous year’s tax return, pay stubs, and income sources to use this tool effectively.
- Make Quarterly Payments: If you’re a pay-as-you-go worker, make estimated tax payments at least once every quarter to meet the IRS requirements.
- Avoid Drastic Withholding Changes: Changing your withholding to receive more weekly cash can lead to underpayment issues. Consider consulting a tax professional to help you make informed decisions.
- Pay at Least 90% of Your Tax Bill: To avoid penalties, ensure you’ve paid at least 90% of your total tax bill before filing your taxes.
- Filers Paying 100% of the Previous Year’s Tax Bill: If you pay the same amount as your previous year’s tax bill, you can avoid the penalty. For high earners or married taxpayers filing separately, this threshold rises to 110%.
The IRS’s decision to increase the underpayment penalty comes after the agency collected a staggering $1.8 billion in underpayment penalties from approximately 12.2 million Americans in fiscal year 2022.
As we approach the year-end, it’s essential for gig workers and self-employed individuals to assess their tax situation and ensure they are on track to meet their tax obligations. By staying informed and following these tips, you can avoid the hefty IRS underpayment penalty and keep more of your hard-earned money in your pocket. Remember, tax planning is a year-round endeavor, not just a once-a-year task.