Penalties on underpayments of income taxes paid quarterly rather than through paycheck withholding have recently surged, writes Laura Saunders for The Wall Street Journal.

There are many groups who pay their taxes this way, including investors, retirees, business owners, and gig workers.

“These charges can hit hard, so getting it right can save people hundreds or even thousands of dollars a year,” said Richard Pon, a CPA in San Francisco.

According to Internal Revenue Service data, the average estimated-tax penalty rose to around $500 in fiscal year 2023 from about $150 in 2022. The number of affected tax filers also increased from 12 million to 14 million.

According to an IRS spokesman, the main reason for this increase is higher interest rates.

To avoid the penalties, taxpayers who owe at least $1,000 normally have to pay 90 percent of their tax bill long before the due date on April 15. Employees have year end as a deadline, while for those with other taxable income, the deadline is usually Jan. 15, when fourth-quarter payments are due.

Taxpayers can use safe harbors to protect themselves against estimated-tax penalties. These are available to filers who paid the IRS 100 percent of their tax for the previous year by year end or Jan. 15 deadline — if their adjusted gross income comes out to $150,000 or less. To qualify, those who earn more have to pay 110 percent of the previous year’s tax.

However, taxpayers need to be aware that these safe harbors only apply per quarter, not the entire year.

Filing IRS Form 2210 and Schedule AI can help avoid having IRS computers impose undeserved penalties on some estimated-tax filers.

Additionally, if you have income that qualifies for withholding when paid, such as withdrawals from traditional IRAs, you could use it to avoid incurring an estimated-tax penalty.

Read more about how to avoid the IRS penalties in The Wall Street Journal.

Want to know if you’re on the right path financially? Creative Capital Wealth Management Group’s Second Opinion Service (SOS) is a no-obligation review with one of CCWMG’s Wealth Strategists.

Fill out the form below to schedule an SOS Meeting and receive our FREE guide to the Top 12 Benefits of Retainer-Based Planning.