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A Tip to Avoid Late Payment Penalties

8/21/2023

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​What to do if you miss a quarterly estimated tax payment

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Many clients like to keep their Federal Tax withholdings as low as possible to avoid the IRS having their funds interest-free throughout the year. Other taxpayers, especially those with non-payroll income, must make quarterly payments to the IRS. As long as these quarterly payments are made timely and the amount of the payments is sufficient in the eyes of the IRS you will not be subjected to underpayment penalties. However, if under paid, the IRS applies late payment penalties in addition to the income tax owed. This penalty applies even if you file your 1040 tax return on or before April 15th.​

The Safe Harbor rule

The tax code has a basic set of rules to determine if you owe a late tax payment penalty. The rule is call The Safe Harbor Rule. Here is a recap of the rule. If you follow the rules, you can avoid any penalties.
  1. If your federal tax obligation is less than $1,000 no underpayment penalties apply.
  2. You withhold at least 90% of this year's federal tax obligation.
  3. You withhold at least 100% of last year's tax obligation
  4. If your gross income is greater than $150,000 ($75,000 if you are married filing separately) you must withhold the smaller of 90% of this year's tax obligation OR 110% of the tax shown on last year's tax return.
If you find federal tax withholdings made so far this year to be too low, what can you do?

Late Payment Penalty Avoidance Tip

If you are an employee there may be a way to avoid a penalty if you underpaid or neglected to pay your estimated tax payment for a quarter. Increase your payroll withholdings in later months of the year to build up your federal withholdings to cover the shortfall. Trying to catch up by paying more on your next estimated quarterly tax payment wouldn't work since the prior quarter's shortfall remains per IRS penalty calculations.

For whatever reason, in calculating a potential underpayment penalty, payroll withholdings are treated as if they were all made at the beginning of the year, while quarterly tax payments (form 1040-ES) are tracked by the date received.

To increase your withholdings simply provide your employer with a revised W-4. Just be careful that you leave enough in your paycheck to avoid other financial hardships.


"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at [email protected]. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA
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145 Tower Drive, Suite 10
Burr Ridge, IL 60527-7836
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  • Home
  • Solutions
    • CFO Services
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    • Bookkeeping Services
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    • Income Taxes
    • Other Services
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    • SmartVault
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    • Record Retention Schedule
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