The Internal Revenue Service (IRS) raised stakes for people who underpay their taxes. They increased the interest penalty, which is meant for assessment in the tax filing season next spring. Recently, the IRS increased its interest penalty on underpayment of taxes to 8%. This is a straight jump from 3% in 2021.
Regarding the increase, the IRS stated that it determines the interest rate every quarter. However, when it comes to taxpayers who are not from corporations, the rate is equal to the federal short-term rate as well as three more percentage points.
Fox Business states –
“Self-employed workers and independent contractors, including many gig workers, will be at risk of being hit with the underpayment penalty if they fail to pay the amount the IRS believes they owe. Taxpayers don’t face an interest penalty for underpayment if the balance due is under $1,000 after their credits and other tax account information is factored in.”
According to the IRS, such workers need to pay their estimated taxes at least once every quarter. However, this act only applies when, in regular pay periods, these workers do not have at least 90% of taxes withheld. For instance, all the taxpayers who are part of this payment program need to make their estimated fourth quarter payment of 2023 by 16 January 2024.
The IRS increased the after it collected $1.8 billion in underpayment penalties for 12.2 million Americans in 2022.
However, taxpayers who are W2 employees will not be affected a lot. Their employers withhold their tax payments before they receive their paychecks. In most cases, taxpayers do not face an underpayment penalty. Rather, they receive a tax refund.