Estimated Tax Penalty (Underpayment of Estimated Tax)

The estimated tax penalty is the IRS charge for not paying enough tax during the year. The United States collects income tax as you earn, either through withholding from a paycheck or through quarterly estimated payments. If too little arrives by the quarterly deadlines, the IRS adds a penalty even when you pay the full balance with your return. This page explains the rule for 2025 returns, the 2026 payment dates and the ways to avoid or reduce the penalty.

Who it affects

Employees with ordinary withholding usually avoid it. The penalty is common for people with income that has no tax withheld: self-employment profit, rental income, interest, dividends, capital gains and retirement distributions without withholding. It also hits employees whose withholding is too low after a raise, a second job or a bonus. Our guides on estimated taxes and self-employment tax cover how to plan the payments.

The due dates

Estimated tax is due in four installments, each covering a slice of the year's income:

For tax year 2026, the dates are April 15, 2026, June 15, 2026, September 15, 2026 and January 15, 2027. When a date falls on a weekend or legal holiday, the next business day applies. Withholding is generally treated as paid evenly through the year, and Form 2210 lets you show that most of it was withheld early. That is why a large year-end increase in withholding can help with an underpayment that happened earlier.

The safe harbors

You will not owe the penalty if either of these is true:

1. The tax on your return, minus withholding, is less than $1,000.
2. Your withholding and timely estimated payments equal at least the smaller of 90% of the current year's tax or 100% of the prior year's tax shown on the return.

The prior-year option uses 110% instead of 100% if the prior year's adjusted gross income exceeded $150,000 ($75,000 if married filing separately). For 2025 returns the prior year is 2024. For 2026 planning it is 2025. Farmers and fishers with at least two-thirds of income from those activities have a different test and use Form 2210-F. No penalty applies if you had no tax liability in the prior year, were a U.S. citizen or resident for all of it and the year covered 12 months.

How the penalty is computed

The IRS treats each installment separately. If a quarterly payment falls short, the shortfall is charged at the IRS underpayment rate for the number of days it stays unpaid. That rate is set each quarter and published on the IRS quarterly interest rate page, so check there rather than relying on a number in an article. Because each installment is judged on its own, paying a large amount in January does not erase a penalty earned in April.

Example (hypothetical). Your 2025 tax was $20,000 and your 2025 adjusted gross income was $120,000. Your safe harbor for 2026 is $20,000, or $5,000 per quarter. If you pay only $2,000 on April 15, the shortfall for that installment is $3,000. The penalty on that $3,000 runs from April 15 until the shortfall is paid or until the return due date, whichever is earlier. The other three quarters are tested the same way.

Reducing or waiving the penalty

• Annualized income method. If your income was uneven, such as a big sale in December, Schedule AI of Form 2210 can lower or eliminate the earlier installments. If you use it for one installment, you use it for all.
• Waiver for casualty or disaster. The IRS may waive all or part of the penalty if a casualty, disaster or other unusual circumstance makes the penalty inequitable.
• Retirement or disability. A waiver may be possible if you retired after age 62 or became disabled in the year or the year before, and the underpayment was due to reasonable cause.
• Federal disasters. The IRS generally applies relief automatically, so Form 2210 is not usually needed unless you use the annualized income method.

Ordinary reasonable cause is generally not enough to waive this penalty, unlike most other penalties. The IRS's general reasonable-cause relief page does not cover it.

Form 2210 and the notice

Most people do not file Form 2210. The IRS will compute the penalty and send a bill. You file it yourself when you want to claim a waiver or use the annualized method, or when the form's instructions require it. Interest is charged on the penalty from the date the IRS assesses it, so pay a billed amount promptly.

How to avoid it going forward

Increase paycheck withholding with a new Form W-4 or make estimated payments with Form 1040-ES. Withholding is often the easiest fix because it is treated as paid evenly across the year.

How we can help

We can calculate your safe harbor amounts, set a payment schedule that fits your cash flow, and decide whether Form 2210 with the annualized method would reduce a penalty already assessed. This is part of our tax planning work, and we also prepare returns for individuals with income from several sources. Contact us to plan the next installment.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.