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CandleFocus Glossary Editor
Underpayment penalties are the bane of taxpayers’ existences, as these fines can be substantial if you’ve underestimated your taxes due. That’s why it’s important to understand how to calculate them.
Underpayment penalties come into play when a taxpayer doesn’t pay enough income tax during the course of the year. The taxpayer might not pay through withholding, pay too little estimated taxes (for business owners, for example) or file their taxes late. When the taxpayer doesn’t pay the required amount, the IRS will start to assess an underpayment penalty.
The penalty is calculated as a percentage of the unpaid tax. Typically, the penalty is 5% of what that taxpayer fell short on. This is applied every quarter until the taxes have been paid in full, capping at 25%. For example, if an individual had $1,000 in unpaid taxes, they would be hit with a penalty of $50. If they still hadn’t rectified their tax bill a year later, their penalty would jump to $125.
To avoid the penalty and interest, the IRS outlines the payment amount that they require to be paid. Generally, an individual must pay the lesser of either 100% of their taxes the year prior or 90% of their taxes the year in question. For high earners with an adjusted gross income (AGI) over $150,000, this amount requires 110% of the previous year’s taxes.
If you do happen to incur an underpayment penalty, it’s not the end of the world. You can usually get the IRS to waive the penalty through filing Form 2210. The IRS considers various factors when evaluating such a request, such as:
- Whether the taxpayer had a reasonable cause - Whether there was a catastrophic event that affected the taxpayer’s ability to pay - Whether the taxpayer was retired or disabled
The IRS's website provides many more details about underpayment penalties, how to calculate them, and how to get them waived. Every taxpayer should familiarize themselves with this information in order to avoid any costly fees. Doing your taxes and paying the required amount each year is the best way to make sure you’re free from any penalty assessments.
Underpayment penalties come into play when a taxpayer doesn’t pay enough income tax during the course of the year. The taxpayer might not pay through withholding, pay too little estimated taxes (for business owners, for example) or file their taxes late. When the taxpayer doesn’t pay the required amount, the IRS will start to assess an underpayment penalty.
The penalty is calculated as a percentage of the unpaid tax. Typically, the penalty is 5% of what that taxpayer fell short on. This is applied every quarter until the taxes have been paid in full, capping at 25%. For example, if an individual had $1,000 in unpaid taxes, they would be hit with a penalty of $50. If they still hadn’t rectified their tax bill a year later, their penalty would jump to $125.
To avoid the penalty and interest, the IRS outlines the payment amount that they require to be paid. Generally, an individual must pay the lesser of either 100% of their taxes the year prior or 90% of their taxes the year in question. For high earners with an adjusted gross income (AGI) over $150,000, this amount requires 110% of the previous year’s taxes.
If you do happen to incur an underpayment penalty, it’s not the end of the world. You can usually get the IRS to waive the penalty through filing Form 2210. The IRS considers various factors when evaluating such a request, such as:
- Whether the taxpayer had a reasonable cause - Whether there was a catastrophic event that affected the taxpayer’s ability to pay - Whether the taxpayer was retired or disabled
The IRS's website provides many more details about underpayment penalties, how to calculate them, and how to get them waived. Every taxpayer should familiarize themselves with this information in order to avoid any costly fees. Doing your taxes and paying the required amount each year is the best way to make sure you’re free from any penalty assessments.