Who the Underpayment Penalty Applies To
You pay tax during the year in one of two ways the IRS recognizes:
- Withholding is tax taken out of your paycheck or other income, such as pension or Social Security payments.
- Estimated tax is money you send the IRS yourself, usually in quarterly payments.
The penalty can apply if these payments fall short of what you owe or arrive late. If you earn income with no tax withheld, such as gig work, estimated payments help fill the gap. See how gig workers handle quarterly taxes.
How to Avoid the IRS Underpayment Penalty
A safe harbor is a payment threshold that generally protects you from the penalty if you meet it. Under IRS Topic 306, you generally avoid the penalty if either of these is true:
| Safe harbor | What it means |
|---|---|
| You owe less than $1,000 | Your tax due is under $1,000 after subtracting withholding and refundable credits. |
| You paid enough on time | You paid at least 90% of this year’s tax or 100% of last year’s tax, whichever is smaller. |
The 110% Rule for Higher Incomes
Higher earners face a stricter prior-year test under IRS Publication 505. For 2026, if your 2025 adjusted gross income (AGI) was more than $150,000, use 110% of last year’s tax instead of 100%. The limit is $75,000 if you’re married filing separately for 2026. AGI is your total income minus certain adjustments.
Farmers, fishers, and certain household employers also have special rules.
Estimated Tax Due Dates
Paying on time matters as much as paying enough. Each payment covers income from a set IRS payment period:
| Income earned | Payment due |
|---|---|
| Jan. 1–March 31 | April 15 |
| April 1–May 31 | June 15 |
| June 1–Aug. 31 | Sept. 15 |
| Sept. 1–Dec. 31 | Jan. 15 of the next year |
IRS Topic 306 notes that you generally pay estimated tax in four equal amounts, and Form 1040-ES is the form for estimated tax. Learn more about paying estimated taxes.
How the Penalty Is Calculated
The IRS bases the penalty on how much you underpaid and how long it stayed unpaid. It applies the quarterly interest rate it publishes for underpayments.
For individuals, that rate is the federal short-term rate plus 3 percentage points, compounded daily. It’s 7% for the quarter that began Oct. 1, 2026, according to the IRS fourth-quarter 2026 interest rate announcement.
If you owe the penalty, the IRS sends you a notice. The IRS also charges interest on penalties.
Using Form 2210
Form 2210 helps you see whether you owe the penalty. If your income was uneven during the year, the annualized installment method (allowing the tax payments to align more closely with your month-to-month income) on this form may avoid or lower the penalty. It is typically more effective for those who earn most of their income at the end of the fiscal year.
When the IRS May Waive the Penalty
IRS Topic 306 says the IRS may waive the penalty in two situations:
- A casualty, disaster or other unusual circumstance made the penalty unfair to impose.
- You retired after age 62 or became disabled during the tax year or the year before, and your underpayment was due to reasonable cause.
Outside these situations, the Internal Revenue Manual says reasonable cause alone can’t remove the penalty.
