The estimated tax penalty is a penalty collected by the IRS when a person underpays estimated taxes or does not pay on time. Individuals must pay estimated taxes on income not subject to automatic withholding, and certain situations may allow a person to obtain a waiver to avoid the penalty.
An estimated tax penalty is a penalty that the Internal Revenue Service (IRS) or other tax collection agency collects when a person underpays estimated taxes or does not pay these taxes on time. Individuals must pay estimated taxes on income that is not subject to automatic withholding, such as self-employment income or interest income. The purpose of the estimated tax penalty is to induce people to pay tax voluntarily. Certain situations may allow a person to obtain a waiver to avoid having to pay this penalty.
In the United States, residents must pay taxes on their income as it is earned or received. Typically, an employer withholds certain taxes from an employee’s income and sends it to the IRS. This does not occur with all types of earnings. In general, no one automatically withholds taxes from self-employment income, interest, dividends, rental income, alimony, or other types of income. This income may be taxable, which means the person who receives it must pay estimated taxes on it or face an estimated tax penalty.
To avoid the penalty in the United States, a person must pay taxes on time and in the correct amount. Estimated taxes are due on April 15, June, September and January. Taxes must be paid on time for each tax period, which means you can’t make up for an underpayment in one period by paying more in the next. A late payment or underpayment results in an estimated tax penalty.
The IRS sometimes grants waivers of the estimated tax penalty under certain circumstances. For example, a person may qualify for an exemption if they suffered an accident, disaster, or faced a serious circumstance that prevented them from making a payment. Also, if a person becomes disabled or retires after turning 62 the year before or the year estimated taxes are due, he or she may qualify for an exemption. Individuals must submit a special form available through the IRS to request an exemption. Essentially, the estimated tax penalty waiver is to prevent unfairness to people who missed payments due to circumstances beyond their control.
The IRS provides Form 2210 to calculate the estimated tax penalty. It is a complex shape; taxpayers can choose to allow the IRS to calculate the penalty and send them a bill for the penalty. Of course, anyone can also hire a tax accountant to do the math. A tax professional will also likely know how to help structure your tax payment to avoid the estimated tax penalty in the future.
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