We’ve been through an extended period of low interest rates — so low, in fact, that for a while there was talk of negative interest rates. During that period, some of us got sloppy with our estimated tax payments. The penalty for paying too little is based on current interest rates. As recently as the first quarter of 2022 it was just 3%. We should always try to be current with these payments, but when rates were this low, the penalty wasn’t too painful if you underpaid for a quarter or two and caught up on April 15.
Those days are over. Rising interest rates mean increased penalties for underpayment of estimated tax. The IRS has just announced the highest rate in years, 8 percent, for the fourth quarter of 2023. If you pay estimates, your third quarter payment is due September 15. Are you ready?
For estimated tax, the penalty is figured as simple interest, but if you have an underpayment after the return’s due date, daily compounding makes the pain even worse.