A Surge in Underpayment of Estimated Taxes
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This is Your Money Matters from The Wall Street Journal.
Welcome to Your Money Matters. I'm Charlie Turner in New York. More and more people who pay quarterly estimated taxes to the government are paying the wrong amount, and by that we mean underpaying, and they're incurring penalties as a result. The reasons for the spike aren't exactly clear. Joining us is Wall Street Journal reporter Laura Saunders. Laura, first, what kind of people typically pay estimated taxes to the IRS?
Who pays quarterly estimated taxes and why do they have different rules?
Well, these are people who are not regular employees who have wages. If you're an employee and you get wages, you have taxes withheld from your paycheck, as you well know. But a lot of people in the economy are moving away from wage-based work. They're working in the gig economy as independent contractors. They're working on platforms like Etsy or eBay or things like that. And they don't have wages. I mean, they don't have taxes withheld from their wages. They just get all the money, and they're independent contractors. Therefore, they have to pay the IRS quarterly.
They could also be employees like Airbnb.
Yes, Airbnb hosts or an investor, an investor who gets a lot of investment income, dividends, capital gains, things like that, just people who are not normal employees.
Right.
All right. The IRS says there's been a big jump in the number of Americans who underpay their estimated taxes.
Yes. Between 2010 and 2015, the number went up about 40 percent. And let me tell you why this is so important. The IRS knows that taxes that aren't paid sometimes never get paid. And that's a problem. You know, honest souls will go on and pay their taxes. These penalties are not large. you know, maybe $100, $150, but they're always attached to a larger amount of tax that hasn't been paid. And so this raises concerns about the system and whether the whole nature of the economy is shifting.
You said that in 2015, the total number of filers owing penalties may have exceeded the number of filing estimated taxes, and it's possible because some who paid quarterly taxes may have made mistakes and others who didn't pay should have.
Yes, that's exactly right. So this is quite a concern.
What types of gig-economy and investment income require estimated tax payments?
And the reasons for it may have to do with all kinds of things. One is that the interest rate they charge you for an underpayment, the penalty is really an interest rate, and it was as low as 3%. So it's really not a big high percentage rate.
So people figure, why bother?
Well, sometimes, especially if they get all their income in the fourth quarter. And then they just wait until April 15th and they pay off a little bit with it. That works for them. Another thing is that the boomers are beginning to retire from being employees with wage-based work. And so they're getting IRA withdrawals and things like that. And sometimes the first year or so, this sneaks up on them. They don't know they have to pay quarterly. And Congress has actually given them a benefit. If you... Get this confused for maybe the year before or year after you retire. You don't have to pay these penalties. You can apply for an abatement of them.
I'm speaking with Laura Saunders of The Wall Street Journal, and you're listening to Your Money Matters. Thanks for listening, everyone. Laura, you also write in this that people who underpay or don't pay, they may be unaware that the government has given them a break on this.
Yes. Well, that's for people who've recently retired and make mistakes because they went from paying on their wages to owing quarterly payments. Maybe they have too little taken from their IRA withdrawals and things like that. But it's usually just for the year after you've retired. You couldn't claim it at, say, 75 if you retired at 65.
But if I'm an Airbnb owner or whatever, if I'm an Uber driver, I may not be privy to the information that would be available to other people. According to your article, you cite a survey from last year that found more than two-thirds of self-employed workers in the gig economy, they received no information about taxes.
Well, that's true.
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