Biden’s IRS just made a change that will cost some taxpayers big time

The Internal Revenue Service (IRS) is raising the rate for individuals who underpay their taxes by raising the interest penalty, effective for the upcoming tax filing season in the spring. In a significant adjustment, the IRS has increased the interest penalty on estimated tax underpayments to 8%, a notable increase from the 3% rate observed just two years ago. This change specifically impacts self-employed workers, independent contractors, and gig workers, who may be at risk of facing the underpayment penalty if they fail to fulfill their tax obligations.

The interest rate penalty is reviewed quarterly, and for non-corporate taxpayers, the assessed rate is now the federal short-term rate plus three percentage points. It is crucial for these workers to make estimated tax payments at least once every quarter unless they have at least 90% of their taxes withheld during regular pay periods. For instance, the estimated payment for the fourth quarter of 2023 is due by January 16, 2024.

Notably, taxpayers are exempt from the interest penalty if the balance due is under $1,000 after accounting for credits and other tax-related information. The majority of W-2 employees, whose tax payments are withheld from each paycheck, are not expected to be significantly impacted by these changes, as they typically receive tax refunds rather than facing underpayment penalties.

Joseph Doerrer, a CPA and financial planner, emphasized the importance of individuals assessing their tax situation as the year-end approaches. He described it as a “cautionary tale” and urged individuals to consider their current financial position.

The adjustment has prompted greater attention to tax planning, as seen in the experience of Sameet Durg, a marketing executive. Durg, surprised by an underpayment penalty in addition to a substantial tax bill in April, now pays closer attention to taxes throughout the year to avoid last-minute financial hits.

To assist taxpayers, the IRS provides a tax-withholding estimator tool, which requires inputting information from the prior year’s tax return, along with relevant pay stubs and taxable income sources. This tool can serve as a valuable resource for individuals to better manage their tax obligations and avoid potential penalties.