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.
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 and features a flowchart designed to help you calculate the penalty.
Part I of underpayment form 2210 will ask you to enter your total tax responsibility after credits from 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.
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.
Zap Away Your Underpayment Penalty
You may be able to eliminate the underpayment penalty altogether. 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.
Boxes B, C and D in Part II of Form 2210 will help if any of these waivers apply to you.
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. 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, or call 877-825-1179 to speak with a tax relief specialist about your situation today.