How Late Can Your Estimated Tax Payments Be Before the IRS Penalizes You?
The IRS does not offer a grace period for missing estimated tax payments. To avoid penalties, you must pay the estimated tax amount on or before the quarterly due date throughout the year.
Current estimated tax due dates are posted here.. Penalties for late estimated tax payments are applied to the “underpayment” of taxes.
If you did not owe taxes last year, paid 90% of this year’s taxes, or owe less than $1,000 this year, the IRS will not assess an estimated tax penalty. Otherwise, taxpayers who owe estimated taxes must make four equal payments in one year to avoid a penalty.
Note that you can adjust estimated payments using the annualized method to avoid late payment penalties if your income varies week-to-week or month-to-month.
How Much Is the IRS Penalty for Missing Estimated Tax Payments?
The penalty amount for late or missing estimated taxes varies based on how much you did not pay, how many days late your payment is past due, and IRS interest rates.
The current interest rate for estimated tax penalties is 8% but can change every three months: https://irs.gov/payments/quarterly-interest-rates.
Keep in mind that an estimated tax penalty for late payment is calculated based on your yearly tax return and not the amount estimated. So, if you end up making more than estimated and did not make quarterly payments, your penalty amount will be higher.
How Do You Know That You Need to Make Quarterly Estimated Tax Payments?
To avoid a penalty for not making an estimated tax payment, you should pay estimated taxes every four months if you expect to owe over $1,000 after deducting withholding and credits.
This also applies if your payments are less than 90% of the current year’s or 100% of the prior year’s taxes.
Special rules for making quarterly estimated tax payments apply to farmers, fishermen, certain household employers, higher-income taxpayers, and nonresident aliens.
The most common estimated taxpayers are self-employed individuals, freelancers, contractors, small business owners, and individuals earning income that does not have tax withheld.
Estates, trusts, corporations, and other business entities may also need to make quarterly tax payments based on estimated tax liabilities and income.
Can the IRS Charge a Penalty for Late Payment of Estimated Taxes If You’re Owed a Refund?
Yes, the IRS can still charge a penalty for missing an estimated tax payment even if you expect a refund.
They assess a penalty on estimated tax late payments when a taxpayer qualifies for a refund because the IRS expects you to pay taxes on income as you earn it. So, even if you are entitled to a refund or do not owe taxes, any late estimated tax payments will trigger a penalty.
The IRS may exempt taxpayers from late estimated tax penalties in exceptional cases.
For example, if the taxpayer can demonstrate a natural disaster, fire, or casualty event prevented them from making on-time payments, the IRS may waive estimated tax penalties.
Retirement or disability can also qualify for an estimated tax late payment penalty waiver under certain circumstances.
Can an IRS Payment Plan Reduce Estimated Tax Late Payment Penalties?
An IRS payment plan such as an installment agreement provides incremental relief for estimated tax late payment penalties. However, payment plans do not eliminate them.
Being on an approved payment plan can help minimize your penalty while you continue making recurring payments until the total tax liability and penalty are paid off with your installment agreement.
It will not erase penalties that accrued before entering into a payment plan agreement with the IRS.
How Can You Dispute or Ask the IRS to Remove a Penalty for Missing Estimated Tax Payments?
If you receive a penalty notice for late estimated tax payments and you disagree with it, contact the IRS as soon as possible.
Your notice will include a phone number to call to speak with a representative about your late or missing estimated taxes.
You may also submit a letter to the IRS explaining the missed estimated payments for taxes and your specific reasons as to why you failed to pay on time. If you send a letter, include IRS Form 843 (Claim for Refund and Request Abatement).
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