FAQs on Penalty for Underpayment of Estimated Tax

Seven Things You Must Know About Estimated Tax Payments

underpayment of estimated taxEstimated tax payment is required to be deposited by the taxpayer generally if the tax payable after reduction of tax credits and withholding tax is $1000 or more. Internal Revenue Code §6654 is regarding the failure by individual to pay proper estimated tax. It provides that a taxpayer will have to pay additional tax in case he fails to pay estimated tax in time. So , you may regard that additional tax on account of your failure to pay the estimated tax as a penalty !

Who must pay estimated tax?

This question is very aptly explained by IRS help that  anyone who satisfies both the following conditions , need to pay estimated tax :

  • You expect to owe at least $1,000 in tax for the current tax year after subtracting your withholding and refundable credits.
  • You expect your withholding and refundable credits to be less than the smaller of:
    • 90% of the tax to be shown on your current year’s tax return, or
    • 100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

So it does not matter is you are salaried or self employed or freelancers . If you earn income and aforesaid conditions are fulfilled, you need to pay estimated tax . However, there are some special rules about fixing liability of estimated tax in case of following class of tax payers :

  • Farmers and fishermen
  • Certain household employers
  • Certain higher income taxpayers
  • Nonresident aliens

How to figure estimated tax ?

Basically , you need to estimate your current year tax . For this , IRS help with  Form 1040-ES to figure and pay your estimated tax. Here you would find

  • The 2018 Estimated Tax Worksheet,
  • The Instructions for the 2018 Estimated Tax Worksheet,
  • The 2018 Tax Rate Schedules, and

You may also need your  2017 tax return  to figuring your income, deductions, and credits for earlier years

When to pay estimated tax?

The due dates for quarterly estimated payments fall near the middle of the months of April, June, September, and January. The deadline for quarterly payment of estimated tax payments for 2018 are as under :

  • April 18, 2018
  • June 15, 2018
  • Sept. 15, 2018
  • Jan. 17, 2019

How to pay estimated tax?

You have a range of options for submitting payment like

  1.  mail your payment,
  2. pay on-line by debit or credit card  or
  3. pay on-line by using the EFTPS system .
  4. You can pay by ACH transfer from your checking account using IRS Direct Pay (free), or pay by phone using the EFTPS system.


Are you liable to underpayment penalty ? How to Know ?

Generally, you won’t have to pay a penalty for 2017 if any of the following apply.

  • The total of your withholding and timely estimated tax payments was at least as much as your 2016 tax. (See Special rules for certain individuals , later, for higher income taxpayers and farmers and fishermen.)
  • The tax balance due on your 2017 return is no more than 10% of your total 2017 tax, and you paid all required estimated tax payments on time.
  • Your total tax for 2018 minus your withholding is less than $1,000.
  • You didn’t have a tax liability for 2017.
  • You didn’t have any withholding taxes and your current year tax (less any household employment taxes) is less than $1,000.

 How much is the penalty for not paying estimated taxes? ?

Generally, the IRS will figure the penalty for you and send you a bill. So yu may need to know how is tax underpayment penalty calculated, however you may  need to figure your penalty in the following three situations.

  • You are requesting a waiver of part, but not all, of the penalty.
  • You are using the annualized income installment method to figure the penalty.
  • You are treating the federal income tax withheld from your income as paid on the dates actually withheld.

For this ,you need to use Form 2210 for computing penalty 

Use our calculator first to know if you are indeed liable for paying penalty for underpayment of estimated tax.

Can the penalty for underpayment of estimated tax be waived?

The answer is Yes . The law allows the IRS to waive the penalty if:

  1. You didn’t make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  2. You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.


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