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. There are two ways to pay as you go. One is through tax withholding
and the other is through estimated tax payments. Topic 355 provides
information on paying estimated tax. If you do not pay enough tax through
withholding or estimated tax payments, you may have to pay a penalty for underpayment
of estimated tax. Generally, most taxpayers will have paid enough tax to avoid
this penalty if they have paid at least 90% of the tax shown on the return
for the current year, or 100% of the tax shown on the return for the prior
year, whichever is smaller. Please refer to Publication 505 for
more information on paying estimated tax payments. There are also special
rules for farmers and fishermen.
Additionally, the payments must usually have been in approximately four
equal amounts to avoid a penalty. However, if you made unequal payments because
your income was received unevenly during the year, you may be able to avoid
or lower the penalty by annualizing your income. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals and Fiduciaries,
to see if annualizing would reduce or eliminate the penalty.
The penalty may be waived if:
- The failure to make estimated payments was caused by a casualty, disaster,
or other unusual circumstance and it would be inequitable to impose the penalty,
or
- You retired (after reaching age 62) or became disabled during the tax
year for which estimated payments were required to be made or in the preceding
tax year, and the underpayment was due to reasonable cause and not willful
neglect.
Please refer to the Form 1040 Instructions or the Form 1040A Instructions for where to report the estimated tax penalty
on your return.
For more information, refer to Publication 505, Tax Withholding
and Estimated Tax.
