Many taxpayers have gone from receiving a large refund in 2018 to owing the IRS more than $1,000 on their 2019 returns! Did you know the IRS can penalize you for Failure to pay proper estimated tax. If this is you, here’s some food for thought.
- The IRS can charge you a penalty if you owe them $1,000.00 or more for under withholding taxes. This penalty was waived for 2018 but may not be for 2019. I know how we hate to research questions on the IRS website but here’s a link to Common Penalties to Individuals.
- The Quick Fix: You can quickly remedy this situation by having extra taxes taken out of your paycheck. Assuming that your income will not change significantly during 2020. You can divide the amount you owe the IRS by the number of pay periods left in the year to determine the “extra” withholding amount per pay period. Then contact your payroll department and have them take that amount from your paycheck as “extra” federal tax withholding.
- The More Accurate Way – Submit a new W-4. Go to the IRS website and use their tax withholding estimator to figure out what you should be withholding. However, you will need to adjust this amount for the number of pay periods remaining in the current year.
- Another More Accurate Way. Prepare a “faux” tax return for 2020 and make sure that you are withholding the tax due calculated on your faux return from your paycheck on an annual basis. However, you will need to adjust this amount for the number of pay periods remaining in the current year.
Our Recommendation for 2020
Assuming that your income will not increase significantly in 2020, use the Quick Fix. It should get you under the $1,000 limit and put you within acceptable IRS limits for paying estimated taxes.
Our Recommendation for 2021
Complete a new W-4 to have a more exact tax withholding from your paycheck.
The Ultimate Solution
Because your tax situation is unique to you, consult with your tax preparer or advisor. S/he should be able to help you determine the best strategy for paying your estimated taxes.