How To Avoid Penalty For Underpayment Of Estimated Tax
Avoiding penalties for underpayment of estimated taxes means making sure you pay enough tax throughout the year, either through withholding or quarterly estimated payments. Here’s how to do it:
Why Does Underpayment Happen?
The IRS expects taxpayers who don’t have enough tax withheld from wages (like self-employed people, freelancers, landlords, investors) to pay estimated taxes quarterly. If you pay too little, they charge a penalty.
✅ How to Avoid the Penalty for Underpayment of Estimated Tax
1. Pay Enough During the Year
You must pay whichever is less of:
- 90% of your current year’s tax liability, OR
- 100% of your prior year’s tax liability (110% if your AGI > $150,000)
2. Make Quarterly Estimated Payments On Time
Estimated taxes are due in four installments:
- April 15
- June 15
- September 15
- January 15 (of the following year)
Pay by these deadlines to avoid penalties.
3. Use Safe Harbor Rules
- If you pay at least 100% of last year’s tax bill (or 110% if high income), you won’t owe penalties — even if your income goes up.
- This is a common safe harbor to avoid the penalty.
4. Adjust Your Withholding
- Increase withholding on your paycheck if possible.
- Withholding is treated as if paid evenly throughout the year, so it can cover for missed estimated payments.
5. Annualize Your Income
- If your income fluctuates through the year, you can use the annualized income installment method (Form 2210, Schedule AI) to calculate estimated tax payments based on actual income earned in each period, potentially reducing penalties.
6. File Form 2210 to Request Penalty Waiver
- If you had a reasonable cause (like natural disasters, death, serious illness), you can ask the IRS to waive penalties.
- Use Form 2210, Schedule A.
7. Keep Good Records
- Track your income, deductions, and payments carefully to avoid surprises at tax time.
- Use tax software or consult a CPA for estimates.
💡 Summary: How Much to Pay & When
| Rule | Minimum to Avoid Penalty |
|---|---|
| Pay 90% of current year’s tax | Based on projected tax |
| OR Pay 100% of prior year’s tax | 110% if AGI > $150,000 |
| Pay in 4 installments | April, June, Sept, Jan |
| Or increase withholding | Withholding counts evenly |