FAQs on Penalty for Underpayment of Estimated Tax

Seven Things You Must Know About Estimated Tax Payments

Estimated tax payment is required to be deposited by the taxpayer generally if the tax payable after reduction of tax credits and withholding tax is $1000 or more. Internal Revenue Code §6654 is regarding the failure by individual to pay proper estimated tax. It provides that a person will have to pay additional dollar (basically interest)  in case he fails to pay estimated tax in time. So , you may regard that additional payments on account of your failure to pay the estimated tax as a penalty !

Who must pay estimated tax?

This question is very aptly explained by IRS help that  anyone who satisfies both the following conditions , need to pay estimated tax :

  1. You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
  2. You expect your withholding and refundable credits to be less than the smaller of:
    • 90% of the tax to be shown on your current year’s tax return, or
    • 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

So it does not matter is you are salaried or self employed or freelancers . If you earn income and aforesaid conditions are fulfilled, you need to pay estimated tax . However, there are some special rules about fixing liability of estimated tax in case of following class of tax payers :

    • Farmers and fishermen
    • Certain household employers
    • Certain higher income taxpayers
    • Nonresident aliens

How to figure estimated tax ?

Basically , you need to estimate your current year tax . For this , you need to use the  Form 1040-ES to figure and pay your estimated tax. The form 1040-ES has a  Worksheet for computation of estimated tax, instructions for the  estimated tax worksheet and the relevant tax rate schedules. When you start estimating the current year ( say year 2020 estimated tax) , keep ready your tax return for year 2019 to figure your income, deductions, and credits for earlier years

When to pay estimated tax?

The due dates for quarterly estimated payments fall near the middle of the months of April, June, September, and January. The deadline for quarterly payment of estimated tax payments for 2018 are as under :

  • April 18, 2018
  • June 15, 2018
  • Sept. 15, 2018
  • Jan. 17, 2019

How to pay estimated tax?

You have a range of options for submitting payment like

  1.  mail your payment,
  2. pay on-line by debit or credit card  or
  3. pay on-line by using the EFTPS system .
  4. You can pay by ACH transfer from your checking account using IRS Direct Pay (free), or pay by phone using the EFTPS system.

 

Are you liable to underpayment penalty ? How to Know ?

If your estimated tax liability is not more than $1000 or the total tax for current year minus your withholding is more than $1,000 .In that case , you need to pay estamted tax under payment penalty. Use form 2210 to know if you really owe penalty for underpayment of estimated tax.

When you must compute penalty for not paying estimated taxes? 

Computing the amount of penalty for underpayment is not necessary , because IRS will compute it at the time of processing your tax return and intimate you about the amount of penalty. Howeever there may be situataions when you will have to compute the estimated tax underpayment penalty . These are :

  • Requested for a waiver of penalty only partly.
  • Computed penalty by using annualized income installment method .
  • You are treating the federal income tax withheld from your income as paid on the dates actually withheld.

If those are the case , you must fill Form 2210 for computing penalty . It is better that you use our calculator for form 2210  to know if you are indeed liable for paying penalty for underpayment of estimated tax and using Form 2210.

Can IRS waive penalty for underpayment of estimated tax ?

The answer is Yes .  IRS can  waive the penalty if:

  1. The reason for failure to pay the estimated tax on account of  disasters, or other unusual circumstance .
  2. You are retired (after reaching age 62) or became disabled during the tax year or the year for which estimated tax was not paid and there exist  reasonable cause and not willful neglect

Where to mail estimated tax payments

For people who are required to make an estimated tax payment, Form 1040-ES which is the estimated tax voucher can be used to submit your payment to the IRS using the following addresses.

Mississippi, Florida, Louisiana, and Texas
Internal Revenue Service P.O Box 1300 Charlotte NC 28201-1300
Alaska, Arizona, California, Colorado, Hawaii, Idaho, Nevada, New Mexico, Oregon, Utah, Washington or WyomingInternal Revenue Service P.O Box 510000 San Francisco, CA 94151- 5100
Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Montana, Nebraska, North Dakota, Ohio, Oklahoma, South Dakota or Wisconsin.Internal Revenue Service P.O Box 802502 Cincinnati, OH 45280-2502
Alabama, Georgia, Kentucky, New Jersey, North Carolina, South Carolina, Tennessee, or VirginiaInternal Revenue Service P.O Box 931100 Louisville, KY 40293-1100
Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, Missouri, New Hampshire, New York, Pennsylvania, Rhode Island, Vermont, West Virginia or VermontInternal Revenue Service P.O Box 37007 Hartford, CT 06176-7007

Others 

The following group of people should mail their Form 1040- ES to the Internal Revenue Service, P.O Box 1300, Charlotte, NC 28201- 1300 USA.

    • People who live in a foreign country
    • People who live in American Samoa
    • People who are excluding income under internal revenue code 933
    • People who live in Puerto Rico
    • People who use an FPO or APO address
    • People who file form 2555, 2555 EZ, 4563
    • People who are dual status alien, or non permanent resident of Guam, or the U.S Virgin Islands.

However, it is important to note that if you are a bona fide reside of Guam, you are expected to mail your Form 1040-ES to:

Department of Revenue and Taxation, Government of Guam, P.O Box 2307, GMF, GU 93921.

Virgin Island Bureau of Internal Revenue

6115 Estate Smith Bay Suite 225

St Thomas, VI 00802

 

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  1. […] estimated tax by a taxpayer. Have you read Penalty for Underpayment of Estimated Tax Simplified and 7 faqs on penalty for underpayment of estimated tax , before you attempt to use the calculator given below for better […]

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