IRS Relaxes the 2018 Penalty Threshold for Individuals Who Pay Estimated Tax

IRS has announced a new policy relaxing the estimated tax rules and their penalties for individuals.  They are doing this because of the complexity of the tax law changes from the Tax Cuts and Jobs Act (TCJA), which was enacted in December 2017.  In addition, the IRS has been unable to issue some of their anticipated guidance due to the lapse in government funding.  The policy is fully described in IRS Notice 2019-11, and it applies only to the 2018 tax year.  The policy does not apply to corporations – only to individuals.

This policy is particularly important to members of our community who pay estimated taxes, including owners who take a draw or dividend from the company, outside salespeople and consultants paid as 1099 contractors, and others who get paid without tax being withheld.

Generally, taxpayers are required to pay tax obligation during the year (rather than waiting until the end of the year). This can be done by either having tax withheld from paychecks, or by making quarterly estimated tax payments.  If too little tax is withheld or paid, then a penalty may apply.

Normally, in most years, the penalty would not apply if tax payments during the tax year met one of the following tests:

  • The person’s tax payments were at least 90 percent of the tax liability for the year or
  • The person’s tax payments were at least 100 percent of the prior year’s tax liability (the 100 percent threshold is increased to 110 percent if a taxpayer’s adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return).

The special rule for 2018 taxes will lower the threshold for the first bullet to 85%.  Thus, if you withhold or otherwise pay (as estimated taxes) 85% of your 2018 tax liability on time, then you will not owe a penalty for underpayment of 2018 federal personal income taxes.

The last 2018 estimated tax payment for natural persons was due on January 15, 2019.  IRS issued the new policy on January 16.

Please read the IRS policy fully in IRS Notice 2019-11, because there are specific details about how to claim the threshold relief.


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