The IRS has announced that interest rates for the second quarter of 2025 will remain unchanged from the first quarter. These rates apply to tax overpayments, underpayments, large corporate underpayments, and corporate overpayments exceeding certain thresholds. While the rates remain steady, their impact on taxpayers and businesses remains significant.
Understanding these interest rates is crucial for anyone managing tax liabilities. Interest accrues daily on unpaid tax balances, increasing the amount owed over time. Conversely, taxpayers expecting refunds may earn interest if the IRS takes too long to process them. With the IRS maintaining the same rates for Q2, individuals and businesses should continue implementing tax strategies to avoid unnecessary interest charges and penalties.
Interest Rates for Q2 2025
For the period from April 1, 2025, to June 30, 2025, the IRS interest rates are as follows:
- Individuals and Businesses: 7% for both overpayments and underpayments
- Large Corporate Underpayments: 9%
- Corporate Overpayments (Over $10,000): 4.5%
These rates are based on the federal short-term rate plus a fixed margin, as set by law. Since the IRS has opted not to change rates from Q1 2025, taxpayers and businesses can expect consistency in how interest is applied to their accounts.
How the IRS Determines Interest Rates
The IRS adjusts interest rates quarterly based on the federal short-term rate, which is determined by the Department of the Treasury. The calculation involves adding a specific margin to the federal short-term rate:
- For individuals and businesses, the interest rate is the federal short-term rate plus 3 percentage points.
- For large corporate underpayments, an additional 2 percentage points are added to the standard underpayment rate.
- For corporate overpayments exceeding $10,000, the rate is the federal short-term rate plus 0.5 percentage points.
Since the federal short-term rate has remained steady, the IRS has kept the same interest rates for Q2. However, these rates can fluctuate in response to economic changes, particularly shifts in inflation or Federal Reserve policies.
Impact on Taxpayers and Businesses
Knowing how these rates impact taxpayers and businesses is critical if you owe a tax balance and helpful if you’re expecting a tax refund.
Individuals with Tax Balances
For taxpayers who owe money to the IRS, the unchanged interest rates mean that unpaid balances will continue to accrue interest at 7% per year, compounding daily. Even a small tax debt can grow significantly over time if left unpaid.
For example, if an individual owes $10,000 and does not make any payments for a full year, they will owe an additional $700 in interest alone. Since interest compounds daily, the longer a balance remains unpaid, the more costly it becomes.
Businesses Managing Tax Payments
Businesses, especially those that make estimated tax payments, should take note of the unchanged rates. If estimated payments are insufficient, businesses may face underpayment penalties and interest charges.
Large corporations with underpaid taxes will continue to face a 9% interest rate on unpaid balances, making it more expensive to delay tax payments. Meanwhile, corporate overpayments above $10,000 will only accrue interest at 4.5%, which is significantly lower than the underpayment rate. This discrepancy encourages businesses to make accurate tax payments rather than relying on overpayments as a financial strategy.
Taxpayers Expecting Refunds
Taxpayers who overpay their taxes and are due a refund may receive interest from the IRS if their refund is delayed. However, at 7%, the overpayment interest rate remains lower than potential returns from high-yield savings accounts or Treasury bonds.
For instance, if a taxpayer is owed a $5,000 refund and the IRS delays payment for six months, they may receive about $175 in interest. While this provides some compensation for delays, it is not a reliable financial strategy. Taxpayers should aim to adjust their withholdings to avoid large overpayments.
Strategies for Taxpayers
Knowing current tax rates can also help taxpayers build strategies to help avoid paying interest, manage refunds, and make smart tax payments.
Avoiding Interest on Underpayments
Since the IRS interest rate on unpaid taxes remains at 8%, taxpayers should take proactive steps to avoid accruing interest charges. Making estimated tax payments on time, adjusting withholding to ensure sufficient tax payments throughout the year, and paying outstanding balances as soon as possible can help minimize interest costs.
For those who cannot pay their full balance immediately, setting up an IRS installment agreement can help manage payments while avoiding additional penalties. However, interest will still accrue on the remaining balance.
Managing Refunds and Overpayments
Taxpayers expecting a refund should file their returns as early as possible to avoid unnecessary delays. While the IRS does pay interest on late refunds, the overpayment interest rate is often lower than what taxpayers could earn by investing or saving that money elsewhere. Adjusting tax withholding to avoid large overpayments can help maximize financial efficiency.
Making Smart Estimated Tax Payments
Self-employed individuals and businesses required to make quarterly estimated tax payments should ensure their calculations are accurate to avoid underpayment penalties. Paying at least 90% of the current year’s tax liability or 100% of the previous year’s tax liability (110% for high-income earners) can help avoid interest and penalties.
Tax Help for Those Who Owe
The IRS has kept interest rates unchanged for Q2 of 2025, maintaining the same rates as Q1. While this provides consistency, taxpayers and businesses should remain aware of how interest accrues on tax balances. Individuals with unpaid tax liabilities should aim to pay off their debts quickly to minimize compounding interest costs. Businesses should ensure they make accurate estimated tax payments to prevent underpayment penalties.
Staying informed about IRS interest rates and adjusting tax strategies accordingly can help taxpayers minimize costs and maximize financial efficiency. Those with complex tax situations should consult a tax professional for tailored guidance. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
If You Need Tax Help, Contact Us Today for a Free Consultation