Penalties for Owing Taxes at the End of the Year

[shubham-123]

If my employer isn't withholding enough taxes during the year and I end up owing a significant amount at the end of the year, will I be penalized? What are the penalties for owing more than a certain amount in taxes?

[VolvoGirl]

If you do not pay enough tax, you may have to pay a penalty for underpayment of estimated tax. Even if you are getting a refund you can still owe a penalty for not paying in evenly during the year.  Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. It is included in your tax due or reduces your refund.

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

[Opus 17]

If you owe a penalty, in general, the penalty is 1% per month of the amount owed, going back to the beginning of the year.  (0.5% per month penalty plus interest on the unpaid amount, which is also about 0.5% per month.)

For example, suppose you owe $6000 when you file on April 15, 2023.  The IRS will deem that $1500 was due April 15, 2022, and is assessed 12 months of penalty and interest ($180); $1500 was due June 15 and is assessed 10 months of penalty and interest ($150); $1500 was due Sept 15 and is assessed 7 months of penalty ($105) and $1500 was due January 15 and is assessed 4 months of penalty ($60) for a total of $495 (a net of about 8.5%).

To avoid penalties, you can adjust your withholding so that you withhold close to what is owed, or make extra payments directly to the IRS each quarter if your withholding is not enough.