Potential Self-Employed Taxpayer Penalties in 2024

If Americans pay their estimated taxes late, they could be in line for a shocking bill from the IRS this spring. Last October, the IRS increased the self-employed taxpayer penalties for filing late or inaccurate payments – or not paying any estimated taxes – to 8%, nearly triple the previous rate of 3%.

In an effort to tighten monetary policy, the Federal Reserve sent interest rates soaring last year to their highest level since 2001. In order to calculate underpayment penalties, the IRS adds 3 percentage points to the benchmark federal funds rate.

The IRS warned that a growing number of taxpayers are being assessed estimated tax penalties, which can amount to several hundred dollars. However, it is generally possible to avoid a penalty if a taxpayer pays at least 90% of his or her taxes during the year.

If you are an average W2 employee, withholding taxes from your income is an obvious option. Taxpayers can adjust their withholding by completing their W4 form with their company’s HR or payroll department. If you believe you will have a shortfall, you can also make additional estimated payments throughout the year.

W4 Form 2024 | Filling out the W-4 Tax Form

However, self-employed individuals, 1099 contractors, and freelancers should pay their taxes quarterly as they do not have taxes withheld from their income. Utilizing the IRS Online Accounts, Direct Pay, or EFTPS are the most efficient ways for taxpayers to pay quarterly electronically.

Experts recommend paying as much as you can by the deadline instead of waiting to pay the entire tax bill to avoid potential self-employed taxpayer penalties if you cannot make the full payment.

Michael Hoefke, Director of Enrollment for Community Tax Relief, also suggested paying more frequently. “Our self employed clients often have the misconception that they must pay quarterly; I always recommend they pay monthly if they can, just like any other bill. That way, it becomes more of a routine and practice they can stick with.”

The failure to make a quarterly payment this year may result in a penalty in the future. Nevertheless, paying by April 15 could help reduce or eliminate any financial fee owed to the IRS.

Sources

“W4 Form 2024 | Filling out the W-4 Tax Form” – Money Instructor

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