AVOIDING IRS UNDERPAYMENT PENALTIES

All taxpayers are required to pre-pay their taxes on a quarterly basis. Employees pre-pay their taxes through payroll withholdings. However, any taxpayer who has either more than one job or substantial income not subject to regular withholdings, such as sales of stock, interest and dividends, may have to pay an underpayment penalty.

To avoid paying a tax penalty from under-paying quarterly estimated taxes, a taxpayer can, on a quarterly basis, pre-pay at least 90% of their current-year liability, or they can pay at least 100% of their prior-year tax liability during the current year.

Taxpayers can easily eliminate any prepayment deficiencies by asking their employer to withhold more from their paychecks, since the IRS treats withholding as being paid equally throughout the year. Taxpayers without this option will have to make quarterly estimated tax payments. Unlike employers' withholdings, this method can not make up for payment deficits of previous quarters, but it can keep penalties from getting any larger.