If you’re a freelancer or self-employed paying estimated taxes late, the IRS has good news for you. They’re waiving estimated tax payment penalties, even if you don’t meet the threshold for “safe harbor” protection. Normally, you would owe the IRS for paying late, but not for your 2018 taxes if the waiver applies to you. Here’s a closer look at the IRS announcement and what it means for freelancers.
Why Did the IRS Issue the Waiver?
Under IRS rules, freelancers and other self-employed individuals must pay the bulk of their taxes throughout the year by estimating their taxes and making prepayments. However, new changes to the law makes this a tricky task for taxpayers. When the IRS first released the tax withholding tables in early 2018, the table did not yet reflect adjustments from newly-introduced tax laws. This affected taxpayers’ ability to correctly calculate estimated tax payments. The waiver provides some relief.
What Does the Waiver Mean for People Who Pay Estimated Taxes?
They must still make estimated tax payments and file their taxes in accordance with IRS rules. Because the details of the waiver can be confusing, consult with a tax attorney to be sure you’re estimating your tax payments and filing your taxes correctly. In general, if you prepaid at least 85% of your estimated tax due, the waiver may apply to you; if you haven’t paid at least 85%, you will most likely not be eligible. For a freelancer who is also receives a W-2, the tax for that part of their income should still be withheld from each paycheck.
What is Safe Harbor?
A safe harbor rule shields you from a penalty or other consequence, as long as you qualify under its boundaries. In this case, the applicable safe harbor rule requires that your tax payments are equal to a percentage of your tax liability for a given year. The waiver means you may still avoid paying a penalty even if you don’t qualify for safe harbor.
How Do I Know if I Should Use the Waiver?
The best thing to do is to talk to your tax attorney. You can be prepared for that meeting by asking yourself a few questions: Did you adjust your estimated tax payments or your tax withholding in 2018? If not, you may need the waiver. Will you have a payment due when you file your taxes? If so, this waiver may allow you to breathe a sigh of relief. Of course, this comes with the caution that just because the IRS issued this waiver for the 2018 tax year, they won’t necessarily extend it into 2019. You may also need to adjust your withholding and estimated tax payments to qualify for safe harbor next year and avoid possible penalties in the future.
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