Owing money to the IRS can be stressful enough. Adding penalties and interest on top of it can make a bad situation even worse. You may wonder how it’s possible to accrue some of these fees in the first place, and as it turns out, there is more than one way to accumulate interest and penalties. If you fail to make estimated tax payments to the IRS, forget to adjust your withholding to the proper amount, or you don’t file your tax returns on time, the IRS has the ability to tack on both penalties and interest. But don’t worry, not all hope is lost!  There are ways you can stop the IRS from penalizing you. Below are a few ways you can avoid penalties and interest while staying up to date on your taxes.

Estimated Tax Payments

1099 earners are typically self-employed contractors or business owners. Since 1099 earners don’t get taxes withheld when they get paid, they are expected to make estimated tax payments to the IRS either monthly or quarterly in order to avoid owing at the end of the year. To understand how much you will need to pay in estimated taxes, you must first figure out your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. When figuring out how much estimated taxes you should pay, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. You can use your prior year’s federal tax return as a guide. If you don’t pay enough tax through estimated tax payments, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.

Adjust your Withholdings

If you’re a W2 earner and didn’t pay enough taxes throughout the year, you may have to pay a penalty for underpayment of estimated tax. It’s a good idea to do a withholding check-up during the year to ensure that you’re on the right track.  If it looks like you may end up owing more than you’re currently withholding, and you can avoid having to pay more at tax season by asking your employer to withhold more from your earnings.

File your taxes on time

Filing your taxes on time could help you avoid a failure to file penalty which could be taken out of your refund or tacked onto your liability. Regardless of whether you are a 1099 or W2 earner, it is recommended that you keep track of all your income and expenses throughout the year. This will make it easier to file once tax filing season comes around. If you end up owing a balance and cannot pay before the deadline, there are options to stop the IRS from placing further penalties and interest against you. The IRS gives you the option to either pay your balance in full, get placed on a payment plan or hardship agreement in order to stay out of collections with the IRS.

Although tax season can be a dreaded time of the year, there are ways to make the process much easier for both you and the IRS. Making sure that you pay your estimated tax payments, adjust your withholdings if necessary as well as filing on time could make this next tax filing season a smoother one. If you have further questions on how to avoid penalties and interest, or if you just want to know more about this next tax filing season, you can visit the IRS’s website to learn more.

 

The content contained on this page is strictly for informational purposes and may not apply to your specific situation. We recommend you consult with a tax professional to evaluate your unique situation. Forward Tax does not provide tax, bankruptcy, accounting or legal advice.

Posted in IRS, Tips