Going Broke from Estimated Tax Penalties? Five Tips to Keep You Out of Hot Water with the IRS

Paying taxes is something that everyone from employees and independent contractors to business owners must address. Because the tax system in the United States is a “pay as you earn” system, taxpayers are expected to pay their taxes throughout the year instead of all at one time.

For taxpayers who do not pay taxes throughout the year or underpay, they may face a large tax penalty when they file their tax returns. If you are going broke paying estimated tax penalties, working with a Maryland tax attorney to identify problems with your estimated tax payments could help eliminate those penalties.

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Who is Required to Pay Estimated Taxes?

Taxpayers can pay their income taxes through withholding or estimated tax payments. Most employees are subject to tax withholding. Employers withhold income taxes based on the current tax tables and submit those amounts to the government. When the employee files his tax return, he is given credit for the amount withheld from his wages during the tax year.

Businesses, self-employed individuals, and individuals with income other than from salary or wages are expected to pay taxes through estimated tax payments. Whether a taxpayer needs to pay estimated tax payments depends on several factors.

In most cases, a person should pay estimated taxes if:

  • Tax liability for the tax year will exceed $1,000 after credit for all federal taxes paid through withholding.

  • Expected income tax withholding and any estimated taxes paid on time will total less than 90 percent of the total tax liability.

  • You owed taxes for the previous years, under some circumstances.

Businesses typically always need to pay estimated taxes. Sole proprietors and independent contractors typically need to pay estimated tax payments to avoid tax penalties.

A Maryland tax attorney can help you determine if you should pay estimated tax payments if you are concerned. Waiting until tax time to determine if you need to pay estimated taxes could result in a large tax penalty.

How to Avoid Estimated Tax Penalties for 2018

The Internal Revenue Service (IRS) is waiving the penalty for underpayment of withholding or estimated tax payments for 2018 for many taxpayers. The IRS recognizes that many companies and taxpayers were surprised by the substantial changes to the tax laws under the Tax Cuts and Jobs Act. Therefore, the agency announced several categories of taxpayers who may qualify to have their estimated tax penalty waived for 2018.

  • The IRS is waiving the penalty for most taxpayers who paid at least 80 percent of their estimated tax liability through withholding and/or estimated tax payments (the typical percentage is 90 percent).

  • The IRS may waive estimated penalties for taxpayers who could not make required payments because of a disaster, casualty, or other unusual event; you retired or became disabled, and the underpayment was not willful; or, the underpayment was because of the inability to calculate the correct amounts because of tax reform.

  • The IRS is waiving estimated tax penalties for qualifying fisherman and farmers who file their 2018 tax returns and pay the taxes due before the initial deadline for filing tax returns.

If you have an unusual circumstance that might entitle you to a waiver of the estimated tax penalty, you can check with the IRS or talk to an experienced tax attorney.

Tips for Avoiding Estimated Tax Penalties

The good news is that you can take steps now to avoid expensive estimated tax penalties. 

1.  Individual Taxpayers

If your employer withholds federal taxes and you owed income taxes for 2018, you can increase your withholding by filing a new Form W-4 with your employer.  The IRS has a 2019 Withholding Calculator on its website to help taxpayers determine their withholding for 2019. The IRS also has a publication on its website to help individual taxpayers estimate their 2019 taxes.

2.  Corporations, Businesses & Self-Employed Individuals

The IRS also provides information for other taxpayers so they can calculate their estimated tax liability for 2019 and they can determine their tax liability for estimated tax payments.

3.  Pay Your Quarterly Estimated Taxes

Make sure that you pay your quarterly estimated tax payments on time throughout the year. The IRS expects taxpayers to divide their estimated tax liability into four equal installments due on:

  • April 15, 2019

  • June 17, 2019

  • September 16, 2019

  • January 15, 2020

4.  Make Sure You Know About Waivers and Requirements

As discussed above, the IRS is waiving estimated tax penalties for many taxpayers for 2018. While some waivers are specific to the 2018 tax year, the IRS has other waivers available for each tax year. You may avoid tax penalties in the future by researching the current waivers available for tax penalties. Understanding the requirements for estimated tax payments is also essential for avoiding penalties.

5.  Work With a Maryland Tax Attorney

Tax laws are complex. The changes in the tax code caught many taxpayers and tax professionals off-guard. Even the IRS had to take time to evaluate the changes in the tax code and issue final regulations and guidelines to implement the changes. Even though we rarely go through major overhauls of our tax code, minor changes in the tax laws and regulations throughout the tax year can have a significant impact on your tax liability.

Working with a Maryland tax attorney throughout the year can help you avoid estimated tax penalties and other expensive tax penalties. Contact Thienel Law today. Maryland tax attorney Steve Thienel is dedicated to assisting clients in Maryland, Virginia, and throughout the DC Metro area.

He can help ensure that you comply with various federal and state tax laws and search for ways you can lower your tax liability to keep more of the money you work hard to earn in your pocket each year.