Although you usually think of taxes as a once-a-year affair due every April 15, the Internal Revenue Service actually collects taxes from workers all year through paycheck withholding. Because of this, everyone is expected to pay income taxes on money as it is earned. If you wait to pay your bill at the end of the year or withhold too little from your earnings, you might face extra charges when you calculate your tax bill.
If you slip up and don’t provide correct information on your Form W-4, or you forget to notify your human resources department of life changes that impact your tax situation, you’ll only face interest charges on the unpaid tax bill in most cases. The interest rate is the federal short-term rate plus 3 percent. Interest is applied to taxes owed following the deadline for filing.
Self-Employment Income: Interest
If you’re an independent contractor or a business owner, the IRS requires you to make quarterly tax payments based on your estimated earnings. If you wait until the end of the year or when you’re filing your personal return, you’ll incur interest at the short-term rate plus 3 percent.
Self-Employment Income: Penalties
If you owe less than $1,000 in income taxes on self-employment income or you paid at least 90 percent of last year’s estimated tax bill, regardless of how much this year’s bill is, you’re off the hook for penalties for not making payments on schedule. If not, you’ll face a penalty on the amount you failed to pay during the year. Your penalty is roughly 2 percent of the unpaid taxes, though early payment reduces that, as do other factors. You’ll need to calculate your penalty using Form 2210.
If you’re able to pay your tax bill and interest due to under withholding by April 15, you’ll have the matter behind you. If underwithholding puts you in a spot where you can’t make your payment plus interest on time, you’ll face a penalty for late payment. Usually, it’s an additional 0.5 percent of the tax you owe, reassessed each month, until you make payment. However, if you continue to avoid payment, tax laws empower the IRS to jack your interest rate up to 25 percent.
Wilhelm Schnotz has worked as a freelance writer since 1998, covering arts and entertainment, culture and financial stories for a variety of consumer publications. His work has appeared in dozens of print titles, including "TV Guide" and "The Dallas Observer." Schnotz holds a Bachelor of Arts in journalism from Colorado State University.