Minimum Tax Withholding With No Penalties

Most business owners know that they have to pay estimated taxes because they don't have income withheld from their paychecks. However, people who have income withheld may also have to pay estimated taxes if they don't have enough withheld. The Internal Revenue Service has several criteria by which it judges whether someone deserves a penalty for underpayment of tax.

Total Withholding

You won't pay any penalty if your total withholding for the year is as much as your tax liability for the previous year. If you don't have taxes withheld because you work for yourself, you must make estimated tax payments that are at least as much as your previous year's tax liability. For example, if your tax liability last year was $2,400, your withholdings or estimated tax payments must be at least $2,400.

10-Percent Rule

If you are required to pay estimated taxes, you won't pay a penalty if you make all your estimated payments on time and your total tax due at the end of the year is less than 10 percent of your tax liability for the previous year. Both of these conditions must be met; if you were late on your estimated tax payments, you'll still pay a penalty if you owe any tax at the end of the year.

Minimum Tax Amount

Whether you have taxes withheld or make estimated tax payments, you don't have to pay any tax penalties if you owe less than $1,000 in taxes at the end of the year. The $1,000 figure doesn't include taxes for household employees. If your personal tax was $900 and you owe $1,500 for household employee tax, you still don't have to pay penalties on your taxes.

No Tax Liability

If you don't have any tax liability, you don't have to pay a penalty, even if you didn't make any estimated payments or have any tax withheld. You only pay a penalty if you didn't pay tax throughout the year like you were supposed to; thus, if you don't owe any tax, you didn't need to make additional payments, and you won't be penalized.


About the Author

Jack Ori has been a writer since 2009. He has worked with clients in the legal, financial and nonprofit industries, as well as contributed self-help articles to various publications.