The IRS is offering a bit of relief for taxpayers, after a recent news release stated its waiving penalties for many whose tax withholding and estimated tax payments fell short in 2018.

It’s generally waiving the penalty for any taxpayer who paid at least 85 percent of their total tax liability during the year through:

  • Federal income tax withholding.

  • Quarterly estimated tax payments.
  • Or, a combination of the two.

For comparison, the usual percentage threshold is 90 percent to avoid a penalty.

Changes under the Tax Cuts and Jobs Act (TCJA).

The IRS explains that the relief is designed to help taxpayers who were unable to properly adjust their withholding and estimated tax payments to reflect the changes under the TCJA.

IRS Commissioner Chuck Rettig said in the release: “We realize there were many changes that affected people last year, and this penalty waiver will help taxpayers who inadvertently didn’t have enough tax withheld. We urge people to check their withholding again this year to make sure they are having the right amount of tax withheld for 2019.”

Recap of tax withholding.

The updated federal tax withholding tables largely reflected the lower tax rates and increased standard deduction generated by the new law. In general, the IRS explains that this meant taxpayers had less tax withheld in 2018 – resulting in more money in their paychecks.

However, the withholding tables couldn’t fully factor in other changes. Those include the suspension of dependency exemptions and reduced itemized deductions. Therefore, some taxpayers could’ve ended up paying too little tax during the year. That is, if they didn’t submit a revised Form W-4 to their employer, or increase estimated tax payments.

Paycheck checkup.

If you remember, the IRS pushed an educational campaign entitled ‘Paycheck Checkup’ that encouraged taxpayers to avoid a situation where they’d have too much or too little withheld. We even wrote a few articles about that here and here.

The IRS states that although most 2018 tax filers are expected to get refunds, some will unexpectedly owe additional tax when it comes time to file.

Further details on the U.S. tax system and the relief.

The IRS offered some additional information to explain the penalty structure and updates due to the waiver.

As you’re aware, the U.S. tax system is pay-as-you-go, meaning taxpayers are required by law to pay most of their tax obligations during the year, rather than at the end of the year. These obligations are taken care of via having tax withheld from paychecks or pension payments, or by making estimated tax payments.

Usually, a penalty would apply at tax filing if too little is paid during the year. So, the penalty would not apply for 2018 if tax payments during the year met one of the following:

  • The individual's tax payments were at least 90 percent of the tax liability of 2018.

  • Or, the individual's tax payments were at least 100 percent of 2017's tax liability. That 100 percent threshold is increased to 110 percent if a taxpayer's adjusted gross income is more than $150,000, or $75,000 if married and filing a separate return.

As outlined above, for waiver purposes only, the relief lowers the 90 percent threshold to 85 percent. So a taxpayer will not owe a penalty if they paid at least 85 percent of their total 2018 tax liability.

If the taxpayer paid less than 85 percent, they are not eligible for the waiver and the penalty will be calculated as it normally would be. More specific details on this can be found in IRS Notice 2019-11.

To read the full news release from the IRS, please click here.

Calculate your withholding.

Did you know? PrimePay has a bunch of handy calculators to help you plan things, like withholding.

Click here to use our Form W-4 Assistant to make sure you’re withholding the proper amount for 2019.

Disclaimer: Please note that this is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.