The IRS just increased a penalty that will shock many taxpayers this year

Photo by Mike Licht,, CC BY-SA 2.0, via Flickr,

Most Americans dutifully fill out their tax forms in hopes they will get a refund of money taken from them by the IRS.

But many Americans have been doing more contract work as “gig” employees who don’t have taxes taken out of their checks.

The IRS just changed the rules, and this new penalty could be a real shock for millions.

IRS increases underpayment penalty

Freelancers, self-employed workers, and gig workers must pay quarterly estimated taxes each year, or else they’ll be hit with a fine.

But this year, any American who underpays these taxes might be slapped with a much higher bill after they file their return.

The IRS penalty for individuals who fail to make accurate, on-time payments or those who don’t pay quarterly estimated taxes at all has skyrocketed to 8%.

This higher rate of 8% is almost triple the prior rate, which was just 3%.

The increase comes as part of several attempts made by the Federal Reserve to tighten monetary policy more aggressively.

Interest rates went soaring last year, reaching the highest level seen since 2001, thanks to the Fed’s policies.

The IRS calculates the underpayment penalty by taking the benchmark federal funds rate and adding three percentage points, which could leave many independent workers at risk of seeing surprisingly high fines this year.

Workers can choose to withhold taxes from their income, or they may choose to make estimated payments four times a year to the IRS.

Some taxpayers can also choose to use a combination of both options, if they prefer.

These options apply to anyone who receives any portion of their income from investments, gig economy work, or self-employment among other types of income.

Filing quarterly estimated taxes is often used by freelancers, independent contractors, and gig workers since no tax is automatically withheld from their income.

Landlords, small businesses, and self-employed workers often choose to take advantage of the practice as well.

According to the IRS, the agency says it has seen a higher number of taxpayers who are subject to the estimated tax penalties.

These penalties can amount to several hundred or even several thousand dollars, but most taxpayers can avoid the penalty by making sure they pay at least 90% of the taxes they owe during the year.

What taxpayers can do

If taxpayers can’t make the entire payment, experts advise to pay as much as possible by the deadline rather than waiting to pay the bill in full.

This method helps to possibly lessen the total amount of the penalty once an annual tax return is filed. 

If taxpayers fail to make their required quarterly payments this year, they could potentially receive a penalty later.

Making payments by the first-quarter April 15 deadline can help reduce some fees owed to the IRS or could even eliminate them entirely.

The IRS says that the fastest way to make quarterly payments is online through its Direct Pay service, where taxpayers can also choose to schedule the payment in advance.

Informed American will keep you up-to-date on any developments to this ongoing story.