The Internal Revenue Service (IRS) is raising the stakes for those who underpay their taxes by ratcheting up the interest penalty that will be assessed in next spring’s tax filing season.
Earlier this fall, the IRS increased its interest penalty on estimated tax underpayments to 8% – a notable jump from 3% just two years ago. The IRS is required by law to recompute the interest rate penalty every quarter and for taxpayers other than corporations the assessed rate is the federal short-term rate plus three percentage points.
Self-employed workers and independent contractors, including many gig workers, will be at risk of being hit with the underpayment penalty if they fail to pay the amount the IRS believes they owe. Taxpayers don’t face an interest penalty for underpayment if the balance due is under $1,000 after their credits and other tax account information is factored in.
Such workers are required to make estimated tax payments at least once each quarter if they don’t have at least 90% of their taxes withheld during the regular pay periods. For example, taxpayers subject to this payment program will make the estimated payment for the fourth quarter of 2023 by Jan. 16, 2024.
Published December 3, 2023 6:40pm EST
IR-2023-221, Nov. 21, 2023
WASHINGTON — Following feedback from taxpayers, tax professionals and payment processors and to reduce taxpayer confusion, the Internal Revenue Service today released Notice 2023-74PDF announcing a delay of the new $600 Form 1099-K reporting threshold for third party settlement organizations for calendar year 2023.
As the IRS continues to work to implement the new law, the agency will treat 2023 as an additional transition year. This will reduce the potential confusion caused by the distribution of an estimated 44 million Forms 1099-K sent to many taxpayers who wouldn’t expect one and may not have a tax obligation. As a result, reporting will not be required unless the taxpayer receives over $20,000 and has more than 200 transactions in 2023.
Given the complexity of the new provision, the large number of individual taxpayers affected and the need for stakeholders to have certainty with enough lead time, the IRS is planning for a threshold of $5,000 for tax year 2024 as part of a phase-in to implement the $600 reporting threshold enacted under the American Rescue Plan (ARP).