What is the penalty for not paying quarterly estimated taxes

U.S. tax operates as a pay-as-you-go system. Many employees pay taxes through paycheck withholding. But if withholding doesn’t apply to you or it won’t cover all your tax obligations, you may need to pay estimated taxes quarterly. But what happens if you fail to pay proper estimated taxes, or not at all? Unfortunately, you could end up with a penalty for underpayment of estimated tax.

To understand what can trigger a penalty, lets cover the details.

For starters, adequately paying quarterly taxes by the dates below will help keep you from incurring the penalty for underpayment of estimated tax. For calendar year taxpayers:

• April 15
• June 15
• Sept. 15
• Jan. 18 of the following year

Want to learn more about how you may be able to avoid this penalty? Check out our estimated tax safe harbor post.

What is the underpayment of estimated tax? 

Underpayment of estimated tax occurs when you don’t pay enough tax during those quarterly estimated tax payments. Failure to pay proper estimated tax throughout the year might result in a penalty for underpayment of estimated tax. The IRS does this to promote on-time and accurate estimated tax payments from taxpayers. 

When doesn’t the estimated tax penalty apply?

The good news is the IRS will not assess a penalty for underpayment of estimated tax if certain exceptions apply. You may qualify for an exception to the penalty if you:

• Have no tax liability during the prior year, you are a U.S. citizen, and your prior tax year covered a 12-month period, or
• Experience an unforeseen, uncommon, or noteworthy event such as a casualty or disaster
• Retired at age 62 or older during the prior or current tax year, and
  • Had reasonable cause for not making the payment, and
  • The underpayment was not due to willful neglect.
• Became disabled during the prior or current tax year
• Qualify for the estimated tax safe harbor

The “estimated tax safe harbor” rule means that if you paid enough in tax, you won’t owe the estimated tax penalty. Here are the rules:

1. If you pay 90% or more of your total tax from the current year’s return or 100% of your tax from the prior year, or you owe less than $1,000 in tax after withholdings and credits.

1. If your adjusted gross income was $150,000 or more (or $75,000 if you’re married filing separately) then you may not be subject to the penalty if you paid the lower of 90% of the tax shown on the current year return, or 110% of your tax from the prior year.

What is the penalty for underpayment of estimated taxes? 

If you’re questioning, “What is the penalty for underpayment of estimated tax?”, it’s not a static percentage or flat dollar amount.

Here’s what will happen and how your late estimated tax penalty will be calculated.  The IRS will send a notice if you underpaid estimated taxes. They determine the penalty by calculating the amount based on the taxes accrued (total tax minus refundable tax credits) on your original return or a more recent one you filed.

Specifically, the IRS calculation for the penalty is based on the:

• Total underpayment amount 
• Period when the underpayment was underpaid
• Interest rate for underpayments (This number changes each quarter. View the IRS’ Interest on Underpayments and Overpayments page for specific numbers.)

Form 2210 (or Form 2220 for corporations) will help you determine the penalty amount. You should figure out the amount of tax you have underpaid. This form contains both a short and regular method for determining your penalty.

To calculate the penalty yourself (other than corporations): 

• Determine the federal short-term rate for the quarter in question.
• Add 3% to that percentage rate

You can let the IRS figure your penalty if:

• You didn’t withhold enough tax by the end of the year.
• You aren’t required to file Form 2210 (box B, C, or D in Part II doesn’t apply to you).

Get help with the penalty for underpayment of estimated tax

Determining estimated tax is not the most straightforward tax topic. For hands-on tax help, learn about the ways to file with H&R Block.

Contrary to popular belief, taxes in the US are not paid all at the same time at the end of the year. They work on a pay-as-you-go basis, with the IRS collecting income taxes throughout the year via payroll. If you are on a company's payroll and receive a W-2 tax form each year, your taxes automatically get withheld from your paychecks, so you don't have to worry about paying taxes until the end of the year, because your company is doing it for you.

As a freelancer, it's different. You are your own employer, and you need to worry about paying your own taxes if you owed more than $1,000 in taxes when you filed your previous annual tax return or you expect to owe that when you file this year's return. It's the same for corporations that expect to owe at least $500 in tax at the end of the year.

You need to pay these taxes on a quarterly basis and estimate the payments based on your previous earnings using the IRS Form 1040-ES.

Key Takeaways:

• Missing an estimated tax payment leads to penalties
• The interest you owe on the unpaid amount adds up daily
• There is also a penalty for underpaying your annual taxes
• There are some situations where you won't be charged a penalty

What happens when you miss a deadline or a payment?

Missing a payment or paying late can lead to estimated tax penalties in the form of fines and interest charges. The Internal Revenue Service (IRS) can charge you fees even if you are owed a refund when you file your annual tax return.

How much is underpayment penalty?

These penalty amounts can change throughout the year based on interest rates, but the interest on unpaid taxes can add up fast. What you owe is compounded daily from the due date of the return, which means the interest is calculated every day based on the total you owe, including interest, rather than the original balance that you owed without interest. Think of it as interest on interest, which is charged until you pay the balance in full, regardless of whether you get an extension.

Let's say you've been making deliveries for Grubhub and Postmates for the last two years, and this year, you forgot to make your second quarterly tax payment by the April 18 deadline. Since you owed $2,400, which is beyond the $1,000 IRS threshold, when you paid your annual taxes last year, you know the IRS is expecting you to pay quarterly taxes this year.

Let's say you used an estimated tax calculator to figure out you owed $600 by April 18, but you missed the payment. Now you owe $600 plus .5% of that amount for each month you don't pay in full. If it's June 18, you will have owed $603 until May 18 and $661.5 from then until now. After June 18, the interest will be compounded again, and you will owe $661.5 plus .5% of that amount.

How much is the penalty for not paying estimated taxes?

The IRS can slap you with an underpayment penalty if you fail to make the full estimated tax payments. This doesn't apply to you if you owe less than $1,000 in tax after withholdings and credits, or if you have paid at least 90% of the tax for the current year or 100% of the tax shown on your tax return for the previous year.

How much is the IRS underpayment penalty?

The IRS underpayment penalty for not paying quarterly taxes fluctuates and changes every quarter. For the year 2022, the IRS charges a penalty of 3%, which is based on the current interest rate, or you can use FlyFin’s tax penalty calculator. This underpayment penalty calculator does the estimated tax penalty calculation for you, so you know what you owe the IRS.

Best ways to avoid the IRS underpayment penalty

• If you expect to earn about the same amount as last year, you can take the amount of tax paid on your 2021 return and divide it by four to figure out your payment for each quarter.
  • If you do this, but you end up earning more in 2022 than you did in 2021 (or end up with a bigger tax bill), you’re going to be required to pay additional taxes but only when you file your annual tax return, and you won’t have to pay a late tax penalty.
  • If your income drops significantly, you can make quarterly payments equal to 90% of your current year’s tax bill.
• If all this sounds complicated, you can use FlyFin’s quarterly tax penalty calculator.
• The IRS penalty rate can be decreased to 0.25% for each month if an installment agreement is in effect.
  • It's powered by A.I. and backed by CPAs, with your expenses categorized based on your income and profession.
  • Pay an accurate tax amount and not a penny more. The entire process takes less than 5 minutes.

IRS calculation for the penalty

The IRS calculates penalties based on:

• Total underpayment amount
• The period when the underpayment was underpaid
• The interest rate for underpayments

For example, if your income tax obligation for the previous tax year was $4,000, and this year you withheld $4,500, but your income tax obligation ends up being $6,000. Since you withheld more than the prior tax year’s income tax obligation, you do not have to pay the underpayment penalty. But, if you made estimated tax payments of $2,000, which is only 30% of your tax obligation and less than your previous year’s income tax, you will likely have to pay an underpayment penalty unless you meet other criteria specified by the IRS. Use the underpayment penalty calculator to figure out your penalty for not paying estimated taxes.

Failure to Pay Penalty

This penalty is charged when you fail to pay your taxes by the due date.

• The IRS late filing penalty is set to 0.5% of the tax owed and up to 25% for each month the tax remains unpaid
• After 10 days, the IRS will issue a final notice of intent to seize property, and the 0.5% rate of the late filing penalty increases to 1% per month
• The IRS penalty rate can be decreased to 0.25% for each month if an installment agreement goes into effect
• You can avoid the IRS penalty if you provide valid reasons for failing to pay on time. To figure out whether or not you owe a penalty, check out the IRS late payment penalty calculator

Failure to File Penalty

You can be charged with this penalty for not filing taxes if you file the returns after the due date without a reasonable cause. Both the failure-to-file and failure-to-pay penalties are incurred after the due date of your tax return, while the late payment penalty IRS fee for quarterly estimated tax payments is incurred throughout the year.

If both a failure-to-file and a failure-to-pay penalty are applicable in the same month, the combined penalty is 5% (4.5% late filing and 0.5% late payment) for each month that your return was late, up to 25%.

If more than 60 days have passed and you have not filed, the minimum penalty is either $435 (for tax returns with a due date after December 31, 2019) or 100% of the tax required to be shown on the return, whichever is smaller.

Exceptions to the Penalty

There are some situations in which you won't be charged a penalty:

Waiver of Penalty

You can file Form 843 to request a waiver of penalties if any of the following apply to you:

• Your estimated quarterly payments were accurate and paid on time
• You generated a large sum of your income later in the year, for example from selling a stock or investment
• A large part of your tax payments occurred earlier in the year, for example if you applied a large overpayment from last year’s return to this year’s taxes
• You changed your filing status to or from married filing jointly
• You filed a joint return last year
• Your 2021 filing status isn’t married filing jointly

To figure out your penalty amount, you can rely on FlyFin’s IRS penalty calculator to help determine how much you owe Uncle Sam. To use the tax penalty calculator, you'll need to provide:

• Your filing status (single, married filing jointly, married filing separately, head of household)
• Your income details (taxes paid in the previous year and your current income)
• Deduction method: standard or itemized
• Quarterly taxes paid in each quarter

What happens if you miss a quarterly estimated tax payment?

Is paying quarterly taxes mandatory?

Can I skip a quarterly tax payment?

How do I avoid estimated tax penalty?