Business & Finance Taxes

IRS Withholding Penalties

    Explanation of the Penalty

    • If an employer underpays any portion of the withholding from the IRS, that employer may be subject to certain penalties. In the case of self-employed individuals, withholding is calculated as an estimated tax and must still be paid or else the person is subject to the penalty. Forms 2210 and 2210-F are the forms used to report the penalty for individuals and farmers, respectively. The penalty rate and circumstances under which the penalty must be paid varies year by year. For instance, in 2009, an employer whose withholding did not equal 90 percent of his 2009 tax or 100 percent of his 2008 tax (whichever is smaller) had to pay the penalty.


    • There are several situations in which a person will not have pay the penalty. If a person's tax withholding in the current tax year is at least as much as her previous year's tax or if the tax balance due on her current tax return is no more than 10 percent of her current year's tax and she have paid all her estimated tax payments on time, then that person will not have to pay the penalty. Also, if a person's total tax for the current year minus withholding is less than $1000 or the person did not have a tax liability for the previous year, then no penalty will be assessed.

    Calculating the Penalty

    • The individual or employer who is charged with a penalty is responsible for calculating the amount of the penalty. There are two methods for calculating the payment; the short method and the regular method. The short method can only be done by those who made no estimated tax payment for the current year or who paid the same amount of estimated tax on each of the four due dates. The regular method involves a few more steps, but will give the same results as the short method. The penalty payment for either method is calculated using the tables and instructions given on Form 2210.

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