The underpayment penalty, and how to avoid it
How the IRS figures the estimated tax penalty, and the ways to avoid it, reduce it or have it waived.
If an estimated tax payment is short or late, the IRS charges a penalty that works like interest, the underpayment rate applied to the shortfall for the days it stays unpaid. Paying the safe-harbor amount on time each quarter avoids it.
Last reviewed September 23, 2026 · Tax year 2026 · Federal
The penalty is figured payment by payment. Each of the four installments is compared with what was paid by its own due date. A later payment is applied to the earliest shortfall first, so paying extra in September stops the charge on a short June payment from September on, but not for the months before.
How it is figured
The charge runs on each shortfall from the installment's due date until it is paid, and stops no later than the April due date of the return. The rate is the IRS underpayment rate: the federal short-term rate plus 3 percentage points, reset every quarter. For 2026 the IRS set it at 7% for January to March, 6% for April to June, and 7% for July to September and for October to December.
An illustration, with round numbers and a flat 7% rate: a payment was $2,000 short, and you paid the $2,000 ninety days later. The penalty is $2,000 × 90 ÷ 365 × 7%, about $35.
This penalty is separate from the failure-to-pay penalty, which applies to tax still unpaid after the return's due date.
How to avoid it
- Pay the safe-harbor amount on time. A quarter of the smaller of 90% of this year's tax or 100% of last year's (110% if last year's AGI was over $150,000) by each due date. The dates are in Estimated tax due dates and how much to pay.
- Raise your withholding. Tax withheld from wages counts as paid evenly on the four due dates, whenever it was actually withheld, so a larger withholding late in the year can cover a short spring.
- Stay under $1,000. No penalty applies when the tax on your return, less withholding, is under $1,000.
How to reduce it
If your income arrived unevenly, the annualized income installment method can lower the earlier payments, and with them the penalty. It is claimed on Form 2210, Schedule AI.
When it can be waived
- Casualty, disaster or other unusual circumstances, where charging the penalty would be inequitable. For a federally declared disaster area, the IRS identifies affected taxpayers by county and applies the relief itself.
- You retired after reaching age 62, or became disabled, in the tax year or the year before, and the underpayment was due to reasonable cause and not willful neglect.
Form 2210
You file Form 2210 to ask for a waiver, to use the annualized method, to show when your withholding was actually taken out, or when you filed a joint return this year or last year but not both. Otherwise the IRS figures the penalty and sends a bill.
Florida has no personal income tax, so this is a federal penalty only.
Sources
- IRC § 6654, failure by individual to pay estimated income tax
- IRC § 6621, determination of rate of interest
- IRC § 6651, failure to file tax return or to pay tax
- IRS, Instructions for Form 2210
- IRS Publication 505, Tax Withholding and Estimated Tax
- IRS, Quarterly interest rates
- Florida Constitution, art. VII, § 5 (no tax on the income of natural persons)
This article is general educational information, not tax, legal, or accounting advice, and does not create a client relationship. Tax law changes and depends on your specific facts. Information is current as of September 23, 2026 for tax year 2026; verify before acting. Consult a qualified CPA, EA, or attorney about your situation.
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