The IRS underpayment penalty is a charge applied when you don’t pay enough taxes during the year. It’s calculated as an interest-based fee on the unpaid amount, with rates that change quarterly. Even if you pay in full by the tax deadline, underpaying during the year can result in penalties.
To avoid it, individual taxpayers must either pay 90% of their current-year tax liability or 100% of the prior year’s tax (110% for higher earners). You can reduce the risk of penalties by adjusting your paycheck withholding and making your estimated tax payments on time.
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What is the penalty for underpayment of estimated tax?
The underpayment penalty is a fee the IRS charges when you don’t pay enough in estimated taxes throughout the year. It applies to individuals, businesses, and self-employed taxpayers who either don’t have enough tax withheld or fail to make sufficient estimated payments.
This penalty isn’t just a federal issue—many states impose their own underpayment penalties. State tax laws vary, and some states don’t even have an income tax.
To check your state’s requirements, visit its Department of Revenue or Taxation website for details on estimated tax payments, penalties, and exemptions. If you earn income in multiple states or have a complex tax situation, a tax professional can help you determine what’s required.
Below, we’ll focus on the IRS underpayment penalty for individual taxpayers, including how it’s calculated, ways to avoid it, and what to do if you owe one.
I recommend monitoring your income each quarter and making estimated tax payments accordingly to avoid underpayment penalties.
For those with fluctuating earnings, the annualized income installment method is a great option; it bases payments on actual income rather than evenly dividing the estimated tax liability throughout the year.
Be sure to mark your calendar with the quarterly payment deadlines: April 15, June 15, September 15, and January 15. And if you have both fluctuating and stable income sources, ensure that your withholdings are appropriate, and review them periodically to stay on track.
What triggers the IRS underpayment penalty?
The IRS underpayment penalty applies to individuals when they don’t pay enough taxes throughout the year. If you owe more than $1,000 after subtracting withholding and estimated payments, you could face a penalty. The IRS generally requires estimated taxes to be paid at least quarterly.
To avoid an underpayment penalty, most individual taxpayers must pay at least 90% of their current-year tax liability or 100% of the prior year’s tax liability (110% if their adjusted gross income was over $150,000). If you fall short, the IRS may charge interest on the unpaid amount.
In some cases, the IRS may waive the penalty. If an unexpected event, such as a natural disaster or serious illness, prevented you from making payments, you might qualify for relief. Taxpayers who recently retired or became disabled may also be eligible for a waiver if they can show reasonable cause.
Notably, corporations have different estimated tax requirements and penalties. If you own or manage a corporation, working with a tax professional can help ensure compliance and avoid penalties.
How much is the penalty for not paying estimated taxes?
The IRS calculates the underpayment penalty for individuals as an interest charge on the amount you underpaid. The penalty is based on how much you owe and how long the balance remains unpaid. It accrues daily and compounds until the tax is paid.
The IRS sets interest rates quarterly, so the penalty can change over time. For example, in the third quarter of 2024, the annual underpayment interest rate was 8%, which means the daily rate was approximately 0.0219% (8% ÷ 366 days).
Since the underpayment penalty depends on both the amount underpaid and how long it was past due, the total cost varies by situation. Short delays in payment result in smaller penalties, while longer underpayments add up over time.
To avoid penalties, taxpayers should make estimated tax payments on time or adjust their tax withholdings to ensure enough tax is paid throughout the year. The IRS provides tools, including Form 2210, to help individuals determine whether they owe a penalty and how much it will be.
How is the tax underpayment calculated?
To calculate the exact amount of an underpayment penalty, the IRS uses a formula based on the amount underpaid, the number of days late, and the quarterly interest rate in effect at the time. You can use IRS Form 2210 to determine your penalty.
Let’s say you’re an individual taxpayer who owes $8,000 in estimated taxes for the year. You should have made estimated tax payments of $2,000 each quarter. However, the first payment was missed and made late, as shown below:
| Due date | Required payment | Actual payment | Days late |
| April 15, 2024 | $2,000 | $0 | 61 days |
| June 15, 2024 | $2,000 | $4,000 (covers April and June) | N/A |
| September 15, 2024 | $2,000 | $2,000 | N/A |
| January 15, 2025 | $2,000 | $2,000 | N/A |
Since the April 15 payment was 61 days late, the penalty is calculated using this formula:
Underpayment × (Days late ÷ 366) × Annual interest rate
So the underpayment penalty for this scenario would be calculated as follows:
$2,000 x (61 ÷ 366) x 0.08 = $26.67
Because the estimated tax payment was eventually made in full on June 15 and there were no other late payments, no further penalties apply. However, if additional payments were late, the IRS would apply the same formula for each underpaid quarter based on the applicable interest rates at the time.
Staying on top of estimated tax payments can help you avoid unnecessary penalties and keep your tax obligations manageable.
How to avoid the underpayment penalty
To avoid the IRS underpayment penalty, you need to ensure you pay enough tax throughout the year. This can be done through tax withholding, estimated tax payments, or a combination of the two. The key is to either meet the IRS’s payment requirements or adjust your payments to match your income.
There are several ways to avoid penalties, depending on your financial situation. Here are our top strategies to help individual taxpayers stay compliant:
1. Pay enough taxes throughout the year
The IRS won’t charge a penalty if you owe less than $1,000 when you file your return. If you owe more than this, you can avoid the penalty by paying at least 90% of your current year’s tax liability or 100% of last year’s tax, whichever is lower.
For example, if your tax bill last year was $10,000, the IRS won’t penalize you if you pay at least $10,000 in estimated payments or withholding this year. However, if this year’s tax bill is lower, you only need to pay 90% of your current tax due to avoid a penalty.
Also, keep in mind that higher-income taxpayers have different rules. If your adjusted gross income (AGI) was over $150,000 (or $75,000 if filing single or married separately), you must pay at least 110% of last year’s tax (versus 100% for lower-income earners) to avoid penalties.
2. Adjust your paycheck withholding
If you receive a paycheck from an employer, you can increase your withholding on IRS Form W-4 to have more tax taken out. This helps cover your tax liability, so you don’t need to make separate estimated payments.
3. Make estimated tax payments on time
Self-employed workers, business owners, and those with investment income usually need to pay quarterly estimated taxes to the IRS. Payments are due on the following dates:
- April 15
- June 15
- September 15
- January 15 (of the following year)
Individual taxpayers can use IRS Form 1040-ES to estimate how much to pay each quarter.
4. Plan ahead if your income changes
If you get a bonus, large investment gain, or unexpected income, consider making an extra payment to avoid penalties. If your income varies, you may qualify to pay different amounts each quarter instead of making equal payments.
By staying on top of your estimated tax payments, you can avoid unnecessary penalties and keep your tax situation under control.
What to do if you’re facing an underpayment penalty
If you’re facing an underpayment penalty, the first step is to determine how much you owe the IRS and whether you qualify for an underpayment penalty waiver.
The IRS may waive penalties in certain situations, such as a sudden change in your income, retirement, disability, or a natural disaster. You can request a waiver by filing IRS Form 2210 with your tax return.
If you can’t pay the penalty or the taxes you owe, you have several options:
- Set up an IRS payment plan. The IRS allows taxpayers to pay their balances over time through a short-term (180 days or less) or long-term installment agreement. The IRS allows you to apply online for a payment plan.
- Request an Offer in Compromise (OIC). The IRS OIC program allows qualifying taxpayers to settle their tax debt for less than what they owe if they can prove financial hardship.
- Ask for a temporary delay in collections. If you’re in a difficult financial situation, the IRS may delay collections by noting your account is currently not collectible. Interest and penalties will continue to accrue, but this can give you time to improve your financial situation.
If you’re unsure how to handle your penalty or tax debt, a tax professional can help assess your situation and recommend the best course of action.
A certified public accountant (CPA), IRS enrolled agent (EA), or tax attorney can determine whether you qualify for penalty relief, help you negotiate with the IRS, and ensure you’re following the right process for reducing your tax burden.
For taxpayers facing larger tax debts or complex IRS issues, a tax relief company may also be able to help negotiate on your behalf. Tax relief companies offer services such as penalty abatement, installment agreement negotiation, and OIC assistance.
A couple of examples from our best tax relief companies list include the following:
- Anthem Tax Services employs tax attorneys and enrolled agents who assist taxpayers nationwide with IRS negotiations, penalty reductions, and setting up payment plans. It offers a service guarantee, meaning clients may be eligible for a refund if the service doesn’t improve their tax situation.
- Community Tax provides tax resolution services nationwide. Its team of attorneys, CPAs, and enrolled agents helps individuals and businesses resolve tax issues. Community Tax also offers tax preparation and assurance services and helps taxpayers negotiate with the IRS.
If you’re struggling with an underpayment penalty, exploring these options early can help you avoid further financial consequences.
