Late Estimated Tax Payment Penalties

Ines Zemelman, EA
Ines Zemelman, EA
• 30.09.22 • 7 mins read

You are always meticulous about following deadlines, but this time you failed to pay quarterly estimated taxes. What if you fail to pay your taxes? Is there anything you can do to make amends?

There will be no severe consequences if you skip a day or two. Remember that the longer the period of time, the larger the penalty for late estimated tax payment will be. 

In this article, we will dive deeper to know more about penalties for late estimated taxes.

Who Is Required to Pay Estimated Taxes?

In many circumstances, people fail to submit estimated tax payments because they were unaware they were required to do so in the first place. This is why people must understand whether or not they are required to pay quarterly tax.

Individuals who are self-employed or have a position in a business (for example, a partner, sole proprietor, or shareholder in an S corporation) must make quarterly estimated tax payments. This usually applies if they anticipate having unpaid quarterly taxes of more than $1,000 when they file their tax return.

If a corporation believes it will owe more than $500 by the time its tax return is filed, it must file quarterly estimated tax.

The estimated tax payment is paid quarterly, according to the IRS's schedule. If you are self-employed and generate a substantial income from multiple investments, you will be required to make estimated tax payments.

Does Anybody Else Have to Pay Quarterly Taxes?

Self-employed individuals are not the only ones who must pay taxes in installments.

Other taxpayers who earn money that isn't subject to withholding are likewise subject to quarterly payments. This can happen in a variety of circumstances, including:

  • Profits from business
  • Interest
  • Gains on the selling of assets such as stocks
  • Alimony that is taxable
  • Dividends

Estimated tax payments, on the other hand, are mostly linked with freelancers, independent contractors, and small business owners.

What Happens if You Don't Pay Your Estimated Taxes on Time?

If you forget/fail to pay your quarterly estimated tax, the IRS will charge you interest and penalties. If you forget, it does not follow that they will.

In the beginning, the IRS will presumably dock an initial tax or around 5% of what you owe. The percentage will increase with each month that you don’t pay your quarterly estimated tax.

The highest penalty they can charge you is 25%, so don't think you're out of the woods just because you've achieved that threshold. If you leave it that way and show no interest in genuinely wanting to make your estimated tax payments, you may end up in legal problems.

What Happens If You Don't Make Quarterly Payments?

Quarterly estimated tax payments must be paid before the due date. If you do not pay by the deadline, you may face a penalty. Even if you missed it by a single day, you will be penalized. This is why you should maintain your tax records as orderly as possible.

Keep in mind the dates for filing quarterly taxes. Paying early is preferable to paying late. The following are the dates for the 2022 tax year:

  • April 15
  • June 15
  • September 15
  • January 15 of the following year

The IRS takes these deadlines extremely seriously, and they expect you to pay estimated taxes on time every time. The only exception is if the date is a bank holiday. In that situation, the payment must be made on the first business day which is not a holiday or a weekend.

Many individuals make the mistake of just deferring it until the next due date, but this comes back to bite them: the longer they wait, the more they will have to pay.

If you do not pay quarterly, the payment will not be reset by the next quarter. It will only expand. So, by the time the following quarter rolls around, you'll probably have a penalty so large that you won't be able to handle it.

What is the annualized income installment method?

For those whose income fluctuates throughout the year, the annualized income installment method is a new approach to dividing expected tax payments.

Typically, quarterly tax payments are done using the standard installment method, which divides your estimated tax liability into four equal installments.

In contrast, the annualized income payment system allows freelancers with fluctuating incomes to pay taxes when they earn less – avoiding penalties.

Can I Have My Penalties Waived?

If you've ever forgotten to pay quarterly estimated tax, you've certainly wondered, "Can my estimated quarterly tax penalties be waived by the time I submit a tax return?"

In most circumstances, if you just neglected to pay your estimated quarterly tax, you'll have to pay the penalty. However, for those who are really fortunate (or just surrounded by circumstances), there may be a silver lining.

In the following circumstances, your penalty may be waived:

Situation 1: Your Earnings Were Uneven

If you did not receive your income equally throughout the tax year, your estimated quarterly tax penalties may be lowered or canceled. In some cases, the IRS permits you to annualize your income and make different unequal payments.

Check Form 2210 to check whether you qualify and if you may get your taxes waived this way. In most situations, you have all of the circumstances to determine if your scenario is acceptable or not.

Situation 2: A Disaster or Casualty Occurred

The IRS may be strict, but not excessive. A self-employed individual may be excluded from estimated tax payments if the delay was caused by a calamity. It would be reasonable in these circumstances if you fail to make a payment or simply did not have the cash by the due date.

For example, assume you were in the hospital when you were required to make your income tax payments. Depending on your circumstances, the last thing on your mind was making estimated tax payments - if you were aware enough to do so.

If you were self-employed and your home office burned down, you would be unable to satisfy your revenue quota. Making quarterly estimated tax payments might be avoided in this manner since, after all, you lost your source of income.

Other Acceptable Situations

There are also additional acceptable situations in which your self-employment tax for this tax year (and maybe the remainder of the year) may be waived. These are the conditions:

  • You retired, once you became 62 years old.
  • The failure to make the payment was not due to purposeful disregard (i.e., you had reasonable cause).
  • You were disabled throughout the tax year in which you were expected to make estimated quarterly payments.

Obviously, if these conditions occur to you, you must provide proof. For example, if you were hospitalized or incapacitated, you must carry your medical records with you.

Steps to Take If You Forget to Pay Self-Employment Tax

Throughout the year, anyone can forget to pay their self-employment tax. You shouldn't, yet it does happen. The following are the actions you should take:

Step 1: Breath

The realization that you have failed to make your estimated tax payments on time might be frightening. You are aware that business is slow, and you are also aware of the penalty. When you look at the IRS envelope, you might want to pretend it doesn't exist and just leave it there.

That being said, at this moment, the best thing you can do is retain your calm and act. Breathe, open the envelope, and analyze the situation. What's done is done, and you must do what you can now.

Step 2: Pay the Most You Can

Ideally, you should pay the entire balance, including the penalty. If you cannot pay the whole amount, please pay as much as you can. Sure, you'll still be charged interest on the remaining funds, but the interest will be lower by the time you make the next payment.

Step 3: Collaborate with the IRS

You might wish to contact the IRS after filing your tax return. They are reasonable, but they have a duty to uphold the tax code all year long. They gather, yet they are not trying to ruin you. They could even be able to waive your fines or fees if the circumstances allow it.

The Bottom Line

You should avoid forgetting to pay your estimated tax. However, if that happens, don't panic. Begin paying as soon as you recall to avoid paying the larger penalties for late estimated tax payments. If your plate is clean by the time you complete your tax return, you should have no troubles the following tax year.