Missed Estimates Can Lead to Steep Penalties, Particularly for Attorneys
Attorneys, particularly sole practitioners who tend to have uneven monthly income as well as partners and firm owners who receive draws instead of or above regular salaries, often must pay estimated taxes on a quarterly basis. Failure to pay these estimates results in penalties, which can be steep.
Draws and Year-End Bonuses
According to the IRS, taxes must be paid as income is earned or received either through withholding or estimated tax payments. If taxpayers don’t withhold enough from their regular paycheck, they are supposed to file estimated taxes every quarter.
Significant dividends, interest, alimony, capital gains, and other income outside of a regular salary can result in the need to pay quarterly estimated taxes. Draws or bonuses can also lead to this liability. Many law firms wait until the end of the year to distribute profits. These large year-end payments are usually not subject to withholding and necessitate an estimated tax payment in the quarter in which they are received.
Penalties for Non- or Underpayment
Anyone who doesn’t pay or is late paying their quarterly estimate is assessed a penalty. Even if a taxpayer is due a refund when filing their annual return, the taxpayer is still penalized for late payment of estimated taxes.
So if an attorney receives a draw one quarter and doesn’t pay estimated taxes because they anticipate having personal losses that will offset that income in another quarter, the attorney will still be assessed a penalty for the missed payment. The penalty will accrue from the date the estimate was overdue until it is paid. The tax is due the quarter the income is earned regardless of the taxpayer’s year-end income and resultant tax situation.
At the end of the year even if a taxpayer has made quarterly estimated payments but still owes money to the IRS, the taxpayer may be assessed a penalty for underpayment of estimated taxes. To avoid this last-minute penalty, ensure payment of either 100% of the prior year’s tax due or 90% of tax for the current year by year’s end, whichever is smaller.
The penalty amount is updated quarterly by the IRS. It is currently 3% of the quarterly estimated tax due and accrues from the payment deadline through the next quarter. Each missed estimate is assessed penalties individually. So if you miss both your first and second quarter estimated payments, you will be assessed penalties on each from the time the payment was late.
State Bar Requirements
Attorneys are required to pay taxes, like all other individuals earning income. Unlike other taxpayers, however, attorneys who are found to evade taxes and willfully fail to file a tax return can be disbarred. Failure to file income tax returns is considered illegal behavior that makes an attorney unfit to practice law. Failure to pay estimated tax returns on their own has not resulted in a disbarment, but attorneys who have failed to pay payroll taxes or been found to have hidden income and therefore evaded taxes have been disbarred in Georgia and other states.
Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer
If you have steep penalties from non-payment of estimated taxes, speak to the experienced attorneys at Wiggam & Geer. We can help you navigate the intricacies of negotiating with the IRS. Contact metro Atlanta’s top tax and bankruptcy attorneys online or call us at (404) 609-1300.