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What Is It?

If you did not pay enough tax either through withholding or by making estimated tax payments, you will have to pay a penalty for underpayment of estimated tax.

General Rule

Generally, you may owe an estimated tax penalty for the current year if the total of your withholding and estimated tax payments for the year did not equal at least the smaller of:

  • 90 percent of your tax for the current year
  • 100 percent of your prior year's tax

There are special rules for farmers, fishermen, and certain higher income taxpayers (i.e., taxpayers with adjusted gross income that exceeds $150,000 or $75,000 if married filing separately).

When a Penalty Won't Be Charged

Generally, you will not have to pay an estimated tax penalty if any of the following applies to you:

  • The total of your withholding and estimated tax payments was at least as much as your prior year's tax, you are not subject to the special rule limiting the use of the prior year's tax, and you made all required estimated tax payments on time
  • The tax balance on your return (minus household employment taxes) is no more than 10 percent of your total tax for the year, and you made all required estimated tax payments on time
  • Your total tax, less your withholding, is less than $1,000
  • You had no tax liability the previous year
  • You have no tax withholding for the current year, and your total tax for the current year (less any household employment taxes) is less than $1,000.

Tip: If you think you owe a penalty but don't want to calculate it yourself, the IRS will calculate it for you and send you a bill. For more information, see IRS Publication 505.

How Do You Calculate The Penalty?

Short Method for Figuring the Penalty

You may be able to use the short method in Part III of Form 2210 to calculate your penalty for underpayment of estimated tax. If you qualify to use this method, it should result in the same penalty amount as the regular method (later) but with fewer computations.

Using the short method, you will basically calculate your underpayment for the entire year and the maximum penalty you owe. If you pay your underpayment before your return is due, you may reduce the penalty according to the formula provided at the bottom of Part III of Form 2210. The instructions are simple and easy to follow. You can use the short method only if you meet one of the following requirements:

  • You made no estimated tax payments for the year (regardless of whether you had income tax withholding)
  • You paid estimated tax on all four due dates in equal installments. You must have paid the same amount on each of the quarterly due dates:
  1. April 15
  2. June 15
  3. September 15
  4. January 15 (of the following year)

Caution: If you made any estimated payments prior to the due dates, the short method could result in a larger penalty than the regular method. You should also consider the regular method if it is beneficial for you to allocate withholding in the actual quarter(s) earned (discussed later). If your income varied during the year, you should consider the annualization method.

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Regular Method for Figuring the Penalty

Use the regular method in Part IV of Form 2210, rather than the short method, to calculate your penalty for underpayment of estimated tax if any of the following applies to you:

  • You made one or more estimated tax payments on a date other than the due date
  • You paid at least one (but less than four) installment(s) of estimated tax
  • You made estimated tax payments in unequal amounts
  • You use the annualized income installment method to determine your underpayment for each payment period
  • You use your actual withholding during each payment period to calculate your payments

If you use the regular method, you will basically determine your underpayment for each of the four annual payment periods, plus a penalty for each underpayment. The penalty imposed is applied to each underpayment for the number of days through April 15 that it remains unpaid. Follow the instructions on Form 2210, Part IV.

Tip: When determining your payment, you must calculate what you have already paid. You may add one fourth of your withholding for the year to any amounts of estimated tax already paid in each period. As an alternative, you may choose to establish how much was actually withheld by the due dates in each quarter and use those withholding amounts in your calculations. You can make this choice separately for the tax withheld from your wages and for all other withholdings. Using your actual withholdings may result in a smaller penalty if most of your withholding occurred early in the year. Further, if you did not receive your income evenly throughout the year, you may be able to lower or eliminate your penalty by calculating your underpayment using the annualized income installment method.

Caution: The penalty is figured separately for each payment period. As a result, you may owe a penalty for an earlier payment period even if you later paid enough to make up the underpayment. This is true even if you are due a refund when you file your income tax return.

Special Circumstances

Farmers and Fishermen

There are special rules that apply to farmers and fishermen. See IRS Publication 505.

Applying For a Waiver

The IRS may waive the penalty for underpayment if either of the following applies:

  • You did not make a payment because of a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty
  • You retired (after reaching age 62) or became disabled during the tax year a payment was due or during the preceding tax year, and both of the following requirements are met:
  1. You had a reasonable cause for not making the payment
  2. Your underpayment was not due to willful neglect

For details on how to request a waiver, see IRS Publication 505.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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