Penalty for not paying quarterly taxes?

Question

I am self employed and this is my 2nd year working this job and last year I paid quarterly estimated taxes but so far this year I have not. My friend who is also self-employed says there is NO penalty if you just wait til the end of the year to pay taxes due. I have been saving $$ in my bank for what I assume I will owe, I just havent been sending them in every quarter. Will there in fact be a penalty even if I pay the exact amount due? If so, Why?

Answer 1

There is a penalty for failure to prepay.  It is equal to the going IRS interest rate on 90% of what you underpay.

Answer 2

The other posters are correct you will probably owe a penalty.  As to your question of why?  The tax system is a pay as you go system, the government spends the money through out the year and needs the influx of cash to pay it's obligation.  Think of it this way, what would happen to you if your employer waited a year to pay you?  Wouldn't you want a little extra assuming you could stay in business?

If you are required to pay estimated taxes you must pay them at least quarterly, however you can pay them more often such as monthly per the 1040es instructions.

Answer 3

I'm not totally sure but you could run into a problem here. Under the self employment tax laws you are supposed to pay every three months. And as the IRS always does they will add interest too it........Check out

http://www.irs.gov

Answer 4

There's a penalty if you owe $1000 or more when you file (including self employment tax), otherwise not.  There are some exceptions to the penalty, but if you haven't paid ANYTHING in, and had tax liability last year, you won't meet those exceptions.  Your friend is wrong.

Why?  Because that's how the law is written.

If you get the estimated amounts paid in before the year ends, you'll probably get away with it even though you have skipped the first two payments.

Answer 5

The estimated tax penaly is 8% using a weighted average of when you should have made the payments.  If you have even income and didn't make any payments at all, it's like paying 4% on the money--which is triple what most bank accounts are paying.  

Answer 6

There are a number of exemptions to the penalty. The most common are if you have paid at least 90% of the tax due or if you have paid at least as much as your 2007 tax liability was. In those cases, you can pay the tax due next year without penalty. Based on what you said, sounds like you would be assessed a penalty for underpayment.