Avoiding Underpayment Penalties
Nobody likes to pay penalties. Even the very word conjures negative images in our minds.
Payment of taxes feels like penalty enough. Failure to pay enough tax to the IRS can result in an underpayment penalty. But you can avoid the penalty.
At tax time a reconciliation is completed, comparing the taxes you owe to the taxes you've already paid. If you put in more than your fair share, you get a refund. If you didn't put in enough, you owe.
The IRS wants your taxes when your money is earned (which generally is presumed to be evenly throughout the year). That's why most of us have taxes withheld from our paychecks, so we pay our taxes as we go while we are earning the money.
Some people (usually business owners) pay "quarterly" taxes. I've put quotations around "quarterly" because it actually isn't every three months. Quarterly taxes for a given year are due April 15, June 15, September 15, and then January 15 (after completion of the year). Like all IRS due dates, if those dates fall on a weekend the due date is pushed to the next business day. Paying 1/4 of your taxes on each of these payment dates follows the pattern of paying your tax evenly throughout the year.
When it comes time for the reconciliation, it doesn't matter if your taxes were paid by withholding or by these quarterly payments - as long as the tax was paid evenly throughout the year. If you pay your quarterly tax liability all on January 15 (instead of quarterly), you will be subject to an underpayment penalty. If you pay your tax with the tax return (instead of by withholding, or quarterly), you will be subject to an underpayment penalty.
If you want to make sure you aren't paying any underpayment penalties, let us know and we can help you adjust your withholding or determine your quarterly tax payment amount.
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