The U.S. tax system is a pay-as-you-earn deal. Workers who don’t have an employer withholding taxes from their paychecks are expected to pony up to the IRS as they make money throughout the year. Otherwise, look out.
“If you owe more than $1,000 at the end of the year and you don’t qualify for one of the [exceptions], you will be penalized,” said certified financial planner and certified public accountant DeDe Jones, managing director of Innovative Financial in Lakewood, Colorado.
The IRS can assess underpayment penalties above that threshold unless:
1) You earn below $150,000 and paid 90 percent of your current-year tax burden or 100 percent of the previous year’s tax bill; or
2) You earn more than $150,000 and paid at least 90 percent of your current-year tax burden or 110 percent of what you paid the previous year.
More from Personal Finance:
Here’s how the Fed rate hike will affect your finances
This is why most Americans tap their retirement savings early
Four tips to help you fight back against high medical bills
While the above generally holds true for all workers, those with taxes withheld by an employer typically are less likely to underpay by enough to generate a penalty.
Also, although the new tax law that took effect Jan. 1 lowered rates individual tax rates and created a 20 percent deduction for qualifying earnings for solo workers (and other business entities that have so-called pass-through income), it doesn’t take much to owe the IRS.
If you have net income — your business income less expenses — of at least $400, that amount is subject to the 15.3 percent self-employment tax.
That levy comprises a 12.4 percent Social Security tax and 2.9 percent Medicare tax and applies to income up to $128,400 in 2018 (up from $127,200 in 2017).