In 2005 the Office of Tax and Revenue (OTR) began to automatically charge a penalty for underpayment of estimated tax by any person, financial institution or business. This change took effect January 1, 2005, for tax year 2004 returns.
OTR will charge 10 percent interest, compounded daily, on any underpayment of estimated taxes. In the past, auditors manually added this charge. OTR’s Integrated Tax System (ITS) is now able to find all underpayments of estimated taxes and automatically charge penalties.
To avoid such charges, taxpayers should remember the following instructions when filing District returns and when planning for the coming tax year:
Instructions for Individuals
- You must pay estimated taxes if your residence is in the District, your gross income is not fully subject to withholding tax, and you have a remaining tax liability of more than $100 for the tax year.
- DC residents must pay estimated taxes on any wages they earn outside the District, unless their employer pays DC withholding taxes.
- Make your four (4) quarterly estimated payments with vouchers from the Form D-40ES booklet. This booklet and other DC tax forms may be obtained from the Tax Forms/Publications page under "Personal Income and Fiduciary Tax" or by calling OTR Customer Service at (202) 727-4829.
Instructions for Corporations, Financial Institutions, and Unincorporated Businesses
- Each corporation, financial institution, and unincorporated business required to file a DC return must pay estimated taxes, if its tax for the year is more than $1,000.
- Pay your estimated tax payments online with the eTaxpayer Service Center or you can use vouchers from the D-20ES or D-30ES booklet, which can be found on the Tax Forms/Publications page under "Business Tax."
Persons with questions about estimated tax requirements may call OTR Customer Service at (202) 727-4829.
Tips for Understanding and Calculating Your Estimated Tax Penalty for Individual Income Tax
- Taxes are due as income is earned. For example, an individual who earns a significant amount of income in a given year must, by both federal and DC law, pay tax on that income as it is earned, rather than waiting until the next year, when the return is filed on April 15. Therefore, if your annual tax liability is not fully covered by withholding, or if you have no withholding, you must make quarterly estimated tax payments. OTR will not charge a penalty if these required estimated payments are made on time and the amount owed at the end of the year is less than $100.
- If your income is regular throughout the year, and you are not covered by withholding, then you would make four equal quarterly payments of estimated tax. However, if you tend to receive the bulk of your income late in the tax year, you are better off using the annualized income method and filing a completed Form D-2210 with your annual return. The annualized income method allows you to make estimated payments based on the actual percentage of annual income received in a given quarter.
Form D-2210 helps you calculate your required quarterly estimated tax payments, plus any penalties resulting from underpayment of these required quarterly payments. There are two keys to understanding the D-2210:
- For most taxpayers (whose income is regular throughout the year) your total payment for each quarter (the total of withholding plus estimated tax payments) must equal 25 percent of either: (1) 90 percent of the current year’s tax obligation, or (2) 100 percent of last year’s tax obligation for the entire 12-month period. Note: You must have been a DC resident for the entire 12-month prior year to use provision (2).
- You will note in Form D-2210 that both required payments and actual payments made are treated cumulatively. In other words, you must pay 25 percent of your obligation by the first quarter, 50 percent by the second quarter, 75 percent by the third quarter, and 100 percent by the fourth quarter.
- You should not fill out Form D-2210 unless it is to your advantage to do so. For example, if your income is regular throughout the year, it is not necessary to calculate your own underpayment penalty - OTR can do it for you and send you a bill. However, since OTR's computerized tax system assumes four equal quarterly payments, you would definitely benefit from filling out Form D-2210, using the annualized income method, if most of your income tends to be received late in the year. You may also fill out Form D-2210 if you think OTR has miscalculated your bill.
- Send the completed Form D-2210, along with your notice of tax due and any payment due with your return. If you are mailing it after receiving a Notice of Penalty Assessment, send it to:
Office of Tax and Revenue
Attn: Estimated Tax Penalty Adjustment
1101 4th St SW, 4th Floor
Washington DC 20024
Outline of the Estimated Tax Penalty for Individual Taxpayers
Individual Income Tax (per DC Code 47-4214 "Underpayment of Estimated Tax by Individuals")
The following requirements apply to taxpayers whose withholding does not fully cover their annual tax liability:
A taxpayer shall pay four installments of estimated tax each year:
- April 15; and
- June 15; and
- September 15; and
- January 15; or equivalent fiscal periods.
- Quarterly estimated tax payments, plus withholding, shall normally (see # 3 below) total 25 percent of the lesser of: 90 percent of the tax due for the taxable year; or 100 percent of last year’s tax obligation (if the taxpayer was a 12-month DC resident during last year).
- Taxpayers whose income tends to arrive late in the tax year may select the “annualized income method” and pay (cumulatively): first quarter - 22.5 percent of tax due for the taxable year, based upon the annualized income for the first three months; second quarter - 45 percent of tax due for the taxable year, based upon the annualized income for the first five months; third quarter - 67.5 percent of tax due for the taxable year, based upon the annualized income for the first eight months; and fourth quarter - 90 percent of the tax for the taxable year.
- Underpayments. The period for underpayment penalty assessment begins on the date when the quarterly installment payment is due (June 15, for example) and ends on the earlier of: the date that the payment is actually made, or the due date of the annual tax return (normally April 15). After the return is filed, the accrued underpayment interest for the year is added to the total tax due for that year.
- The underpayment penalty will not be imposed if tax due (Line 41 of Form D-40) is less than $100, providing all required quarterly payments have been timely; or the taxpayer had no tax liability for the preceding 12-month year and was a DC resident during that preceding 12-month period.
The underpayment penalty will not be imposed if, upon appeal to OTR by the taxpayer, the Mayor determines that:
(a) The taxpayer retired after having attained the age of 62, or became disabled in the taxable year in which the estimated payments were required to be made, or the underpayment was due to reasonable cause and not to willful neglect; OR
(b) By reason of casualty, disaster, or other unusual circumstance, the imposition of the penalty would be against equity and good conscience; or
(c) The taxpayer dies during the taxable year.