Tax Penalty for Underpayment of Estimated Tax

If you pay estimated tax, there is a chance that you could have to pay a tax penalty at the end of the year. Here are the basics of the tax penalty for underpayment of estimated taxes.

Estimated Taxes

If you are self-employed, you are going to have to pay estimated taxes to the IRS. This means that you have to guess how much money you are going to make over the course of a year and send the IRS an estimated tax payment. You will need to divide the amount into four different payments. 

Penalty

If you do not pay enough money in taxes through these payments, you will potentially have to pay a penalty. You have to pay the smaller amount between 100 percent of last year's taxes or 90 percent of what you owe this year in order to avoid paying a penalty. If you have not paid either one of these amounts, you are going to have to pay a tax penalty.

Avoiding Penalties

If you were the victim of some type of extenuating circumstance such as a disaster or death, you can avoid this penalty in some cases. If you retired, you can also get out of paying this penalty. 

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