Underpayment Penalty
An Underpayment Penalty is a financial penalty imposed by the Internal Revenue Service (IRS) on taxpayers who fail to pay sufficient estimated taxes throughout the year. This typically occurs when a taxpayer does not pay at least 90% of their current year tax liability or 100% of their prior year tax liability (110% for higher income taxpayers), resulting in an underpayment for the tax year.
The penalty is calculated based on the amount of underpayment during each installment period, and it is assessed as a percentage of the underpaid amount. Taxpayers can avoid this penalty by ensuring they meet the payment thresholds or by having sufficient withholding from their income.
For example, if a taxpayer owes $5,000 in taxes for the current year but only pays $3,000 in estimated taxes, they may be subject to an underpayment penalty on the $2,000 difference if they do not meet the safe harbor thresholds.
« Back to Glossary Index