The IRS released information today that should come as a relief to taxpayers and tax preparers as we start work on our 2018 tax returns. The IRS will be waiving the estimated tax penalty for taxpayers on their 2018 tax return who didn’t have enough withholding and estimated tax payments to cover their tax liabilities.
This is an important development because it is widely assumed that a much larger number of people are going to be in this situation than in normal years. When the IRS adjusted the withholding tables back in early 2018, they really just guessed at what the withholding should be. As it turns out, depending on the taxpayer’s situation, this withholding isn’t going to be enough to cover the tax liabilities on an individual’s wages and any other income on their tax return.
So, what exactly is this waiver? Well, normally, the IRS doesn’t charge a penalty as long as the taxpayer pays at least 90% of their annual tax liability through a combination of income tax withholding on their wages plus any additional estimated tax payments made through the year. For 2018, the IRS will reduce this percentage to 85% of their total tax liability.
As a reminder, we have a pay-as-you-go tax system where you are supposed to pay your income taxes as you earn your income. The tax payments are generally made through withholding that your employer withholds on each of your paychecks. In addition to withholding, if your employer doesn’t withhold enough or you are self-employed, you’re expected to pay in estimated tax payments on a quarterly basis.
The 4th quarterly payment for individuals was due yesterday, on January 15, 2019. However, the penalty is calculated based on the number of days late that the IRS receives your payment. In case you missed it, I always recommend paying it as soon as possible to minimize any penalty assessed by the IRS.
You can read the full IRS announcement here: IRS Announcement IR-2019-03