What Is Penalty for Underwithholding Taxes?
Every taxpayer is responsible for making sure that enough money is withheld from his paycheck for income taxes. If you don't have enough withheld, you could be hit with a range of penalties.
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The W-4 Form
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Your employer uses your federal W-4 form to determine how much to withhold. If you claim too many allowances on your W-4 or wrongly claim to be exempt from withholding, then too little money will be taken out of your pay for taxes.
Threshold
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If you owe more than $1,000 when you file your taxes, you may be charged an underwithholding penalty. However, if you have withheld an amount equal to your tax liability for the previous year, then you will not be penalized. This is known as the "safe harbor" rule.
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Interest
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The IRS will charge you interest on the amount it believes should have been withheld, starting from the date it should have been paid. The rate is the federal funds rate, plus 3 percent, compounded daily until the tax is paid.
Penalty
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The IRS can also impose a late-payment penalty: 0.5 percent of the total tax due, assessed every month until the tax is paid.
Criminal Penalty
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Knowingly filing for false allowances on a W-4 can get you a fine of up to $1,000 and a year in jail.
Strategy
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Keep track of your withholding during the year. If too little is being taken out, fill out a new W-4 in time to boost your withholding before year's end.
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