The United States income tax is a pay-as-you-go tax, which means that tax must be paid as you earn or receive your income during the year. You can either do this through withholding or by making estimated tax payments. If you do not pay your tax through withholding, or do not pay enough tax that way, you might also have to pay estimated taxes. If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
Required Annual Payment--Safe Harbor: For tax year 2023, individuals are subject to an underpayment penalty unless total withholding and estimated payments equal the smaller of:
--90% of the tax shown on the 2023 return, or
--100% of the tax shown on the 2022 return (110% if taxpayer's 2022 AGI was over $150,000/$75,000 MFS)
Underpayment penalty does not apply if:
--Tax due after subtracting withholding is less than $1,000.
--Taxpayer was US citizen or resident and had no tax liability on a 2022 return that covered 12 months.
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Quarterly Payments:
The required annual payment must be paid in four equal installments to avoid a penalty. If any installment is paid late, the penalty is charged in that quarter. The penalty is interest on the underpaid amount for the number of days the payment is late. Interest is charged at the federal rate for underpayments and is not compounded.
2023
First Installment: 4/15/24
Second Installment: 6/17/24
Third Installment: 9/16/24
Fourth Installment: 1/15/25
A fourth quarter 2024 payment is not required if the taxpayer files Form 1040 and pays any tax owed by January 31, 2025.
Estimated Tax vs Withholding Tax:
A taxpayer who underpays an installment cannot avoid the underpayment penalty by overpaying the next installment. In contrast, an employee who has insufficient withholding midyear can eliminate an underpayment penalty by increasing withholding for the remainder of the year because withholding is generally considered to be paid in four equal installments.
Exceptions to penalty:
1) Request for waiver. The IRS may waive the penalty in the case of casualty, disaster or other unusual circumstance. A waiver may also be granted if an individual becomes disabled or retires after reaching age 62, and the underpayment was due to a reasonable cause and not to willful neglect.
2) Annualized Income Installment Method. Required quarterly payments can be calculated based on actual income and deductions in each quarter. If income was higher in later quarters of the year, this method may reduce the penalty by lowering required quarterly payments at the beginning of the year.
3) Using Actual Payment Dates for Withholding From Wages. Withholding from wages is considered to have been paid in four equal installments. A taxpayer can elect to apply withholding to the quarter it was actually paid. The election can reduce the penalty if a large amount of tax was withheld at the beginning of the year.