Can someone explain this 44$ penalty for not witholding enough tax?

[Critter · Accepted solution]

You'll have to pay an underpayment penalty for 2016 if you owe more than $1,000 in taxes (after withholding) and:

·   Your taxes withheld don't cover at least 90% of what you owe for 2016, or

·   Your taxes withheld aren't at least 100% of what you owed for your 2015 taxes, if your adjusted gross income (AGI) is up to $150,000, or

·   Your withholding is 110% if your AGI is more than $150,000. (The AGI amount is $75,000 if you're married filing separately.)

Example: In 2015 Ellen paid $6,000 total in taxes. She changed jobs and thinks her income will be lower in 2016, so she plans to pay $5,000 in estimated tax payments for 2016.

When Ellen prepares her 2016 return, she has a bigger tax bill than she expected -$6,500, which is $500 more than last year. Since Ellen only paid $5,000 in estimates, she must pay a penalty on the underpaid tax.

Ellen would not have had to pay a penalty if she had either:

• Paid $5,850 in estimated payment (90% of 2016 taxes), or
• Paid $6,000 in estimated payments (100% of 2015 taxes).

[cornelljune1968]

While the penalty is small you might want to look at your withholdings at each Quarterly testing date.  You can compute the penalty by claiming the actual amount of withholding each quarter and if it is large enough it might reduce the penalty - maybe even eliminate it.  Pull up Form 2210. The IRS computes the penalty using the assumption the taxes were withheld equally all year.  However if you had a bonus or more income in the early part of the year - your withholding might be greater in Q1, Q2 or even up to Q3 and eliminate the penalty in those earlier quarters.

[cornelljune1968]

A trick to consider - if you approach year end and know you are underpaid with estimated taxes - you can cure the problem by having your employer make extra withholding in the 4th Quarter to make up the shortfall.  The IRS treats withholdings as made equally each quarter for the computation - not when actually withheld.  Some high rollers use this to avoid the penalty by even giving a check to an employer's  payroll department to add the amount to the withholdings in December.

[eddiesxx]

I had the same problem a few years ago.  I deleted the penalty assessed by turbo tax, and never heard from the IRS.

[lamontjon]

The IRS has a tool that will help you to determine your potential tax for the coming year and if you have enough withholding being taken out.  It is the Withholding calculator, just type that into the search box.  The tool will also populate a W-4 form if you wish to change your withholding, just print it, sign it and give to your employer.