Avoid underpayment penalties by increasing tax withholding from salaries

What is Underpayment Penalty?

The underpayment penalty is a tax that you may be subject to if you do not pay enough tax during the year. The IRS will calculate the amount of your underpayment based on your income, marital status and number of dependents. If you have an employer-sponsored retirement plan (like a 401(k)), then your withholding may be adjusted so that it does not result in an underpayment penalty at tax time. The calculation for determining whether or not someone owes an underpayment penalty looks like this:

• First, subtract what was withheld from their salary during the year from what they actually owed in taxes for that year (this includes any additional payments made on April 15th). This gives us our "net" figure--how much we actually paid out during the year. Then multiply this by 1% (.01) as our interest rate; finally add another 50% (.50) onto whatever number we got from step 2 above!

Reasons for Underpayment Penalty

The IRS imposes an underpayment penalty if you don't pay enough tax throughout the year, or if you don't make estimated tax payments when required. The most common reasons for this include:

• Underestimating your tax liability

• Not claiming all available deductions and credits (e.g., student loan interest)

• Not withholding enough taxes from salary or other income sources, such as dividends or capital gains If you think that you might be subject to an underpayment penalty next year, consider increasing the amount withheld from each paycheck by completing Form W-4V with your employer before January 1st of next year.

How to Avoid Underpayment Penalty

The best way to avoid an underpayment penalty is to accurately estimate your tax liability and claim all applicable credits and deductions. You can also increase withholding from salary, but this will reduce the amount of money that you have available for spending each month. If you're self-employed, consider making estimated tax payments throughout the year instead of waiting until April 15th when most people make their final payment.

How to Calculate Withholding from Salary

To calculate withholding from salary, you need to know the annual salary and the number of pay periods. Divide the annual liability by the number of pay periods and subtract any other withholding (such as 401(k) contributions). This will give you an estimate of how much should be withheld from each paycheck.

Tools to Help Calculate Withholding from Salary

There are many tools available to help you calculate withholding from salary. These include:

• Tax calculators. These online tools allow you to enter your income and expenses, as well as other information about your family, to calculate your tax liability for the year and determine whether or not you will owe money when filing your return.

• Tax withholding calculator. This tool allows employees to enter their wages and other relevant information so that they can see how much their employer should be withholding from each paycheck in order for them not to owe any taxes at all on April 15th (or whenever they file).

• Paycheck calculators. These programs allow employees who have already been paid by their employers but haven't yet filed with the government what their actual take-home pay will be after taxes have been deducted from their checks; this is especially useful if an employee wants confirmation before filing his or her own return because he/she thinks he/she may have overpaid or underpaid his/her taxes during the year

Tips to Help Avoid Underpayment Penalty

The IRS has provided these tips to help you avoid underpayment penalties:

• Review your W-4 forms regularly. You should review the number of allowances you claim on your W-4 at least once a year, especially if there are changes in your personal or financial circumstances that could affect how much tax should be withheld from each paycheck.

• Keep track of income changes. If you get married or divorced, have children and/or become eligible for other credits or deductions that reduce taxable income (such as child care expenses), this will likely change the amount of taxes taken out of each paycheck.

• Review the return for accuracy before filing it with the IRS by April 15th each year; if necessary, adjust withholding amounts as needed before filing so there isn't an underpayment penalty assessed against them later on down the road!

Penalties for Underpayment

• Late payment penalty. The IRS imposes a penalty of 10% of the amount due for each month or part of a month that the tax remains unpaid. If you pay your taxes late, this penalty can be avoided by paying at least 90% of your total tax liability when you file your return and paying the balance within 15 days after receiving notice from the IRS that you owe additional taxes (assuming no other penalties apply).

• Accuracy-related penalty. The accuracy-related penalty is 20% of any underpayment attributable to negligence or disregard of rules or regulations by either you or your preparer(s). In order to avoid this penalty, make sure that all income reported on your return is correct; if there are errors in reporting income, take steps immediately to correct them before filing Form 4852 with Form 1040X-A.* Failure-to-file penalty: If you don't file an income tax return when required by law, there's no way around this one--you'll have to pay! The amount varies depending on whether it's been less than three years since filing was due or more than three years since filing was due; see Publication 556 for details.* Failure-to-pay penalty: This applies if any part of what should have been paid wasn't paid by April 17th following its due date (April 15th if filed electronically). The amount depends on how long it took before full payment was made; see Publication 505 for details

How to Request a Waiver of Underpayment Penalty

To request a waiver of the underpayment penalty, you will need to file Form 843. If you are requesting a waiver for more than one year and have not filed your return, you must also attach Form 2210 (Underpayment of Estimated Tax by Individuals, Estates and Trusts) along with your Form 843. If you do not qualify for automatic relief from the IRS because:

• You did not pay enough through withholding or estimated tax payments; or

• Your total tax liability was less than $1,000; then you must complete Form 9465 (Request for Innocent Spouse Relief), which can be found on the IRS website here: https://www.irs.gov/pub/irs-pdf/f9465sp011818a_bkltg_wp__us_dc__nysd_nyc__nyc__nyc_.pdf

How to Request an Extension of Time to Pay Taxes

If you need more time to pay your taxes, the IRS offers several options. You can submit Form 4868 (Application for Automatic Extension of Time To File U.S. Individual Income Tax Return) by its due date to get an automatic six-month extension of time to file your return. However, this only applies if you owe taxes and have not paid them in full by the regular due date of your return (April 15). If you owe money but have already filed a return before receiving an extension from the IRS, then consider filing Form 1127 (Agreement To Extend Time To File Certain Employee Plan Returns). This form allows employers who sponsor employee benefit plans such as 401(k)s or other retirement accounts to request an extension on behalf of their employees until October 15th following their normal filing deadline for such information returns--typically March 31st each year--if those forms weren't filed within 30 days after year end as required by law.*

Conclusion

• Avoiding Underpayment Penalties by Increasing Tax Withholding from Salaries

• How to Increase Your Tax Withholding From Salaries

• The Bottom Line: If you want to avoid underpayment penalties, it's best to increase your tax withholding from salaries.