In a significant development that spells trouble for gig economy workers and consultants, the Internal Revenue Service (IRS) has sharply increased the penalty for tax underpayments. The penalty, which has nearly tripled since 2021, has now reached 8% as of October 1, a considerable jump from the 3% rate observed just two years ago.

This steep increase in penalties particularly affects pay-as-you-go workers, such as gig economy participants and consultants, who do not have taxes withheld and neglect to make estimated quarterly payments before the annual tax filing in April. Even those who have taxes withheld may face the higher penalty if they fail to accurately calculate and pay taxes on additional income. Individuals receiving higher-than-expected dividend payments are also not exempt from this elevated penalty.

The motivation behind this substantial penalty hike becomes clearer in light of the IRS’s collection of a staggering $1.8 billion in underpayment penalties from approximately 12.2 million Americans in the fiscal year 2022. To avoid these fines, taxpayers are advised to pay at least 90% of their tax bill before filing, or have a difference of less than $1,000, whichever sum is higher. Meeting this threshold ensures that filers can sidestep penalties.

There is good news for those who pay 100% of the previous year’s tax bill; they are exempt from the penalty. However, for those earning over $150,000 or married taxpayers filing separately with an income exceeding $75,000, the threshold rises to 110%. These measures are aimed at encouraging accurate tax calculations and timely payments to avoid the financial sting of heightened penalties.

As the IRS intensifies its focus on underpayment penalties, it is crucial for taxpayers, especially those in the gig economy, to stay informed about the evolving tax landscape. The key to avoiding these penalties lies in proactive financial planning, accurate tax estimations, and timely payments to Uncle Sam.