IRS Penalties for Failure to Estimate Withholding
Regardless of profession, everyone must pay taxes. For the majority of taxpayers, employers regularly withhold revenue from each paycheck for taxes. However, for those who are freelancing or self-employed, officially known as independent contractors, estimated withholding payments are required by the IRS. Failure to make these payments on time can result in heavy penalties.
Failing to estimate withholding means a penalty in the form of late fees. It is important to note that late fees are not a one-time penalty. These overdue charges are assessed on a monthly basis at a rate of 0.5 percent. Additionally, if IRS notification of delinquency is later received but still not paid, the rate of monthly penalty increases to 1 percent monthly.
Estimated taxes generally must be paid quarterly and in equal installments. Failure to do so triggers a penalty in the form of interest. Interest begins to accrue from the date each payment is due. The rate of interest is pegged at the federal short-term interest rate plus an additional 3 percent. Interest accrues quickly on accounts, as it compounds daily.
If you alter an amount on a W-4 to eliminate or reduce the necessary withholding of estimated taxes, the IRS can assess additional penalties. If there is no basis for altering the correct figures, the IRS can assess a penalty of $500. Willfully giving false information or failing to supply information can also mean a criminal penalty of one year in prison, a $1,000 fine or both.
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