Understanding the Safe Harbor rule and how to avoid penalty

If you are self-employed or working in a job that doesn’t provide a typical W2, you may have irregular income and pay quarterly, estimated tax payments. If you are a W-2 employee, it’s likely your employer withholds taxes from your paychecks. In either scenario, when you complete your income tax returns your actual tax liability is determined, usually requiring tax payers to pay the difference or receive a refund.

So what happens if your estimated tax payments or withholdings don’t align with your income? Do you face a penalty? That’s where the Safe Harbor rule comes into play.

Through the Safe Harbor rule, the IRS does provide some leeway, including:

  • If you anticipate you’ll owe less than $1,000 after subtracting your withholding, you’re safe.
  • If you pay 100% of your tax liability for the previous year in estimated quarterly tax payments, you’re safe. Note, if your adjusted gross income for the year is over $150,000 then it’s 110%.
  • If you pay within 90% of your actual liability for the current year, you’re safe.

The deadline to review and adjust your withholdings to avoid tax penalties is January 15. Contact our tax advisors to review your withholdings or estimated payments and ensure you’re covered by the Safe Harbor rule.

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