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Why are Americans Underpaying Their Estimated Taxes?


Why are Americans Underpaying Their Estimated Taxes?

According to the Internal Revenue Service (“IRS”), there has been an increase in the number of penalties assessed for underpayment of estimated taxes. Between 2010 and 2015, the number of taxes owed to the IRS increased from $101 billion to $161 billion. In 2010, 7.2 million filers were penalized for underpaying their estimated tax payments; as of 2015, this number has increased to 10 million. In fact, the number of taxpayers owing penalties, is likely to have exceeded the number of taxpayers filing estimated taxes. Although this does not sound feasible, it is very much possible. Taxpayers who actually paid their quarterly taxes may have made mistakes and other taxpayers who should have made quarterly payments did not pay estimated taxes at all.

Surprisingly (or not surprisingly), millions of people do not understand that they need to pay quarterly taxes or possibly increase their withholding to escape these charges. This is very common for business owners, investors, and service providers because they have income that is not subject to withholding, unlike wages earned by employees. The IRS expects that estimated tax payments be remitted by these individuals based on the amount of income received during each period. These estimated tax payments allow wage earners and non-wage earners to be on a level playing field. If a taxpayer is both a wage and non-wage earner, they are responsible for increasing their withholding from their wage earnings to cover the non-wage income, or they can pay quarterly tax payments on that non-wage income.

So, what exactly is a quarterly estimated tax payment? Estimated tax payments are quarterly taxes paid to the IRS on income that is not subject to withholding tax as it is earned. Although this sounds fairly simple and straight-forward, things can get complicated because these payments must meet certain thresholds, and if they do not, then there will be a penalty on the underpaid amount based on IRS interest rates.

Although the lack of payments, as well as the incorrect payments, submitted to the IRS has increased, research does not provide a precise reason for this problem. Tax preparers credit various factors with the surge, such as: (1) the increase in the IRS penalty interest rate from 3% to 4%; (2) retirees taking required distributions from retirement plans and failing to make payments on that income; and (3) growth in the “gig” economy.

The “gig” economy refers to self-employed individuals that choose when and where to work. They may provide services to others, such as make-up artists, hair stylists, Airbnb hosts, or Uber drivers. These workers are usually unaware of quarterly tax payments and the penalties associated with failure to pay. According to a survey conducted at the Kogod Center, 69% of self-employed workers did not receive any tax guidance from the platform they used to prepare their taxes. In addition to their unfamiliarity with quarterly tax payments, they are also unaware of useful write-offs and deductions that can lower their tax liability.

There are usually only a couple scenarios that exempt a self-employed taxpayer from making these payments to the IRS: (1) quarterly estimated tax payments are not required for individuals who expect to owe less than $1,000 in taxes; (2) withholding equates to at least 90% of the taxes you owe, it is likely that you are not required to remit quarterly payments. It is always better to be safe than to be sorry. Consult with one of our Global Law tax law advisors or call us at (703) 712-8000. If you don’t make these payments upfront, you may be financially strained and unable to remit payments once the additional penalty fees and interest are added to the initial tax owed.

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  • 17 Nov, 2017
  • suzette blackwell
  • Estimated Tax Payments, Global Law, IRS, Quarterly Taxes,

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