Topic 306 - Penalty for Underpayment of Estimated Tax

The United States income tax is a pay-as-you-go tax, which means that you must pay tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. If you do not pay your tax or you pay an insufficient amount of tax through withholding you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen, certain household employers and certain higher income taxpayers. Please refer to Publication 505, Tax Withholding and Estimated Tax, for more information.

Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty. However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax.

The law allows the IRS to waive the penalty if:

  1. You did not make a required payment because of a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  2. You retired (after reaching age 62) or became disabled during the tax year for which you should have made estimated payments or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

Refer to the Form 1040 Instructions (PDF) or the Form 1040A Instructions (PDF) for where to report the estimated tax penalty on your return.

More Tax Topic Categories

Page Last Reviewed or Updated: January 16, 2015