Avoiding Tax Penalties & Interest

Jan 30

We all love paying more than our fair share of taxes......WRONG! Underpaying your taxes throughout the year can result in steep penalties and interest, adding to the amount you were already obligated to pay. These penalties and interest are compounding and can quickly spiral out of control. Let’s discuss some tax basics and how you can ultimately avoid this unnecessary cost.

What kind of taxes do I pay on my wages and self-employed income?

When it comes to earned income, the two major buckets of taxes are income taxes and employment taxes. Income taxes can include federal as well as state and/or local. Employment taxes are items like Federal Insurance Contributions Act (FICA), which help fund the Social Security and Medicare programs as well as other taxes that help fund federal and state unemployment programs. Here is a breakdown of the income and FICA taxes for employees (EE), employers (ER) and self-employed (SE) persons:

        
                Tax Type
                Tax Rate
                EE/ER % Split
                SE Person %
            

        
                Federal Income Tax
                10-37% based on income
                100%
                100%
            

                State Income Tax
                0-13.3% based on state and income
                100%
                100%
            

                Local Income Tax
                0-~4% based on municipality and income
                100%
                100%
            

                Social Security*
                12.4%
                50/50%
                100%
            

                Medicare**
                2.9%
                50/50%
                100%
            

    
            *
            This tax is capped at a wage and/or net self-employment earnings of $184,500 for 2026.
        

            **
            There is an additional tax of 0.9% of earnings over $200k for single filers ($250k for Married Filing Jointly).
        

When do I pay taxes?

If you are an employee and on payroll, these taxes are withheld every paycheck and remitted according to your states’ schedule. If you earn self-employment income, you must calculate and remit these payments yourself. There is an IRS mandated schedule in which four, equal installments of your total tax throughout the year are due. They are generally due by:

April 15
June 15
September 15
January 15 (of the following year)

Any overpayments will be refunded or any tax due must be remitted when you file your annual tax return.

How do I make estimated payments?

For federal estimated payments, these can be made online (link) or by mailing in Form 1040-ES. For Hoosiers filing in Indiana, the state estimated payments can also be submitted online (link) or by mailing in Form ES-40.

Why do I need to make estimated payments?

Underpaying your taxes throughout the year can result in serious penalties. Interest is calculated not only on the outstanding tax due but on the associated penalties as well! Therefore, accurate estimated payments must be calculated and remitted to the appropriate agencies. You can typically avoid any underpayment penalties under the following circumstances:

You owe less than $1,000 when you file a timely filed return (this does not mean, though, that you can make a lump-sum payment toward the end of the year if self-employed)
You pay in 90% of your current year’s tax in four, equal installments
You pay in 100% of your prior year’s tax in four, equal installments (if your adjusted gross income is greater than $150k, you must pay in 110%)

For those who file an extension, this extends the time to file (avoiding the failure to file penalties) but does not extend the time to pay (and the associated underpayment penalty). If you extend, any estimated tax due must be remitted along with the submission of your extension request. Remitting accurate estimated payments is a tax essential.

The Key Solutions

Everyone’s tax situation is unique. There are a lot of factors that are considered when calculating accurate estimated payments, not just the topics discussed above. The keys to successful estimated payments:

Partner with a knowledgeable tax professional
Compile proactive projections of the activity for the year
Include prompt updates to the underlying assumptions as things change throughout the year; this way, future estimated payments can be adjusted accordingly

Don’t wait for the IRS to calculate your penalties and interest. At Sonata, I transform the headache of estimated payments into a predictable process. I not only calculate your quarterly payments and forecast tax effects but also provide timely check-ins to adjust projections as your business grows. This proactive strategy keeps you compliant and ensures you retain maximum capital.

My number and email are always open. For Indianapolis clients - lunch is on me for an in-person discussion!

Evan Foley