What Happens When There Is Estimated Tax Underpayment

The tax system of the United States is a pay-as-you-go system. Tax payments are usually required as you earn income. If you don’t pay your tax on time, you will be charged with a penalty. You have to quarterly make estimated payments if any of the following applies:

• If there are no taxes withheld by your employer from your paycheck.
• If all of your income is not covered by the taxes withheld.

Due dates for the estimated tax payments:

  • 15th of April

  • 15th of June

  • 15th of September

  • 15th of January of the following year

If these days fall on holidays or weekends, the due for your payment is on the next business day instead.

Penalties for Late Payment for Estimated Tax

When computing for the overlooked estimated tax payments, any payment made after its due date is added in the total amount paid for the next quarter.

For instance, if you paid your second quarter payment which was due on June 15, 2019, two weeks after the due date, your payment will be considered by IRS to be made in the third quarter.

IRS will notify you of any estimated tax fees and penalties.

Estimated Tax Underpayment

You will possibly pay a penalty for underpayment if both of these apply:

• If during the year you do not make payments for the estimated tax.
• If you have withheld from other income an amount where your tax bill is less than 90 percent.

To prevent from making penalties for underpayment, make payments for the estimated tax if:

• You are self-employed.
• You generating other income that has no tax withheld.

For late estimated tax payments, the IRS applies this system to compute for your penalty:

• The IRS estimates the tax amount you have to quarterly pay when you file your return.
• There is a penalty rate or a percentage applied by the IRS to figure your quarterly penalty amount.
• To get the penalty for your underpayment, each quarter the penalty amount is totalled.

Allowing your Penalty to be calculated by the IRS 

One of the possibilities if you already underpaid your tax is to let your penalty be calculated by the IRS. You can have IRS compute for your penalty if:

• By the end of the year, you did not withhold enough tax.
• The exemptions are not applicable to you.
• You did not file Form 2210.

If you paid the tax due on or before the specified date in the IRS bill, there won’t be an additional cost to have the IRS compute for the penalty. In some cases, filing Form 2210 is necessary.

At What Time the Penalty is not needed

A penalty will not be assessed by the IRS if certain exceptions apply. Payments for the estimated tax will not be the same as withholding if you meet the requirements for an exception. There are situations and exemptions where a penalty is not needed which includes the following:

• The amount of your estimated quarterly tax payments and withholding tax payments was at least as much as your tax in the previous year.
• For the whole year you were a resident alien or a U.S. citizen and that you had no tax liability in the previous year.
• You have an outstanding tax balance in the previous year and you had that amount or more of tax withheld from your salary in the current year. In spite of this, if your adjusted gross income or the AGI was beyond $150,000.00 – or if married $75,000.00 filed separately – at least 110% must be paid off the previous year’s tax.
• You had no less than 90% of the current year’s tax withheld from your salary.
• The amount withheld is greater than the amount you owe by no more than $1,000.00.
• Your 2019 tax is not more than $1,000.00 and you did not have any taxes withheld.

Means to Eliminate or Lower the Penalty

You may avoid the penalty or may lessen the penalty that you owe if the exemptions are not applicable to you. You must file Form 2210 to do this. If any of the following apply, file Form 2210:

• The estimated quarterly payments were enough and appropriate for your tax situation. For instance, you have an outstanding tax of $20,000.00 and you quarterly you paid $5,000.00.
• Later in the year, a big part of your income is generated. For instance, in December you made a profit by selling an investment.
• Earlier in the year, a big part of your tax payment happened. For instance, a big part of the overpayment is made to this year’s taxes from the last year’s return.
• You changed your filing status from or to married filing jointly. If you both filed as a single in the previous year and you married this year, the last year’s tax on your spouse’s return and the last year’s tax on your return can be combined. See if Publication 505: Form 2210 or the Estimated Tax and Tax Withholding instructions both apply:
• Last year you filed a joint return.
• In 2019, your filing status is not married filing jointly.
• You are either a fisherman or a farmer and your quarterly estimated tax payments plus withholding are at least 66.67% of your tax in 2019.
• There was a casualty or disaster which makes imposing a penalty unfair for the IRS. Attach a statement explaining the casualty or disaster to your return.
• You are either disabled or retired, and due to a reasonable cause, you make an underpayment rather than neglecting it purposely. Attach a statement that explains the reason for the underpayment in your return.

Changing Your Withholding to Avoid a Penalty

Together with your employer, you can file a new W-4 form if before the year ends you discovered that you will owe more taxes than you are withholding. You will not be penalized if you have withheld the full amount of your taxes at the end of the year.

By making an estimated payment, you will not get the same result. If late in the year you make an estimated payment when calculating the penalty the date matters.