How to Calculate Underpayment Penalty
If you underpaid your federal taxes in the past, then you might be looking at a penalty from the IRS. Taxes are generally withheld by your employer, but self-employed entrepreneurs don’t get income taken out of their payment.
You may have accidentally underestimated how much money you were going to make over the next quarter and, therefore owe the IRS additional taxes plus a fee.
Fortunately, calculating the underpayment penalty you owe shouldn’t be that difficult. You simply need to get your hands on the right IRS form to do it. That’s especially good news considering that you probably don’t want to have to spend any extra time doing something as unpleasant as calculating how much more money you owe the feds!
In an overwhelming majority of cases, you’ll only need form 2210 to get the job done.
Using IRS Form 2210 to Calculate An Underpayment Penalty
IRS Form 2210 is known as the Underpayment of Estimated Tax by Individuals, Estates and Trusts form. You can easily acquire it from the federal agency. It features a flowchart designed to help you calculate the penalty, which should make it easy enough to follow. The flowchart is very general, so you shouldn’t run into a situation where you have to worry about whether or not a certain step applies to you.
Part I of underpayment form 2210 will ask you to enter your total tax responsibility after the credits cited on your normal 1040. You’ll also need to add any other relevant taxes such as the self-employment tax as well as any refundable sums, like the premium tax credit. It should then ask you to add these values together and multiply them by 90 percent.
Keep in mind that you don’t want to multiply them by the number 90 unless you feel like giving the IRS a whole bunch more of your money! They’re actually concerned with 90 percent, so if your calculator doesn’t have a “%” key you’ll want to multiply the sum of those two values by .9 instead. You’ll want to make sure there’s a decimal point in front of it if you don’t have that elusive percent sign.
You’ll then need to subtract your withholding taxes from this new number and figure out the required annual payment. It might sound like a job and a half to get through, but doing it correctly can save you plenty of money. The bottom of this form provides a small chart that should help you figure out the total penalty you owe based on the number you’ve come up with. It gets multiplied by a small fraction, so don’t get caught up on how large the value looks right now. This isn’t the amount you need to pay in the end.
Multiplying it by that fraction will cut it down by orders of magnitude, so make sure to take a nice deep breath before you proceed to the next step!
Depending on your particular circumstances, you might not even be held liable for paying the penalty. There are some ways to have it absolved, but you’ll need to make sure that you qualify first.
Zap Away Your Underpayment Penalty
You may be able to eliminate the underpayment penalty altogether if you do. If you owe less than $1,000 after subtracting any relevant credits or previously withheld money, then you’re not responsible for the underpayment penalty. You also won’t owe the IRS any additional money if you’ve already paid at least 90 percent of the taxes due for the year. Those who have paid all of their taxes due on their previous return can also zap away this penalty.
The IRS might waive it if you underpaid as a result of a disaster. While nobody ever wants to be in this kind of situation, you may be able to make this claim if your area suffered something on the scale of a hurricane or other phenomenon that caused the federal government to classify where you live as an official disaster area.
Boxes B, C, and D in Part II of Form 2210 will help if any of these waivers apply to you. Make sure to read all of these boxes carefully because you won’t want to miss any potential money-saving opportunities like this. The IRS created these kinds of programs because they understand that people in certain situations won’t be able to pay all the tax they’re owed right away.
While we might be used to thinking of IRS agents as inhuman, at the end of the day they’re actually people just like the rest of us!
Solving IRS Underpayment Problems
Taxpayers who find themselves needing to pay an underpayment penalty might end up getting worked up about the situation. The first step to solving the problem is to take a deep breath. You can’t make good decisions if you’re stressed.
The best decision you can make right now, though, is to get in touch with those who can handle the particular details of your case. We have the staff to help you out.
In fact, Success Tax Relief has been helping people find legal and safe ways to reduce their total tax burden for years now. Our professionals can help you find the best way to pay off any penalties you might have incurred. Contact us online for a free consultation. You’ll be able to speak with a tax relief specialist about your situation today.