It is more often than not, painful to write the IRS a tax check annually, but worse when you have to pay penalties on top of the taxes, some that you could have evaded in the first place. However, many taxpayers forget to review their financial statuses or withholdings within the year, ending up with underpaid taxes. To ensure that taxes are taken seriously, the IRS has perfected its list of penalties, and you have to take your taxes seriously if you are to avoid paying them.
To help avoid the IRS penalties as a result of underpaying, you have to consider two basic rules: first, keep your tax dues under $1,000 by the tax day by paying them all throughout the year. Second, use payroll withholdings or pay taxes quarterly. These two rules might appear simple and easy to follow but many taxpayers still find it hard to adhere to, and end up paying fewer taxes than they should, eventually attracting penalties.
Take a look at the IRS Form 1040, line 61 or 35 of Form 1040A, and see to it that the listed amount is paid up. If you believe your income is on a steady rise, paying at least 110% is safer. Taxpayers who pay through payroll withholdings are at an advantage, as the IRS treats the payment as being paid evenly all through the year even if it is paid in one go in December. Use the previous year’s tax liability to work out an estimated amount for the current year to avoid underpayment. Use the year-to-date withholding column on your to do this.
Employed taxpayers can approach this issue by evenly spreading the extra costs through the rest of the checks. Raise the withholdings on the last four paychecks and pay by the end of the year. Taxpayers, who own corporations can choose to write themselves a massive paycheck, then subtract the state and federal income taxes for the whole year all at once. You may end up with a net paycheck of $5 for a gross paycheck of $150,000. The IRS doesn’t like this strategy, but it is legal and acceptable.
You can save a reasonable amount of money in IRS and state underpayment penalties by using all the cash all year and pay federal and state taxes in January the following year. The unemployed on the other hand, have to pay their quarterly estimated taxes on time to evade penalties. This can easily be done using the EFTPS system where you pay electronically without paying any fees.
The IRS has a special form that is designed to help eliminate penalties for six months, which only works if you can fully pay by October 15th and you meet all the other requirements.