If you have a side gig where you make money or if you are an intendent contractor, you may be hit hard by the IRS this spring if you underpay the amount of taxes the government says you owe. The IRS has increased the interest rate charged for underpayment from 3% to 8% this year, a significant increase that is compounded daily.
From the Internal Revenue site, it gives this information:
For individuals, the rate for overpayments and underpayments will be 8% per year, compounded daily. Here is a complete list of the new rates:
- 8% for overpayments (payments made in excess of the amount owed), 7% for corporations.
- 5.5% for the portion of a corporate overpayment exceeding $10,000.
- 8% for underpayments (taxes owed but not fully paid).
- 10% for large corporate underpayments.
This won’t affect most people who are W-2 employees who have taxes withheld by their employers. Most of the time more money is withheld by the employer than is owed and the IRS sends a refund.
It could be a surprise for those keeping track of their taxes on a quarterly basis. With this substantial increase in the rate, it is important look at what taxes have been paid so you won’t take a hit in April.
The IRS assesses this rate quarterly and it is subject to interest rates going up and down in the country.
Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.
The jump to 8% was announced this fall.
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