Understanding the IRS Underpayment Penalty

TL;DR: Have 90% of your income withheld or pay 100% of last year’s tax liability to avoid underpayment penalties (under most circumstances).

The US tax system is pay-as-you-go, so if you’re not withholding enough you could be in for a surprise come tax season. Specifically, a 0.5% penalty per month on the amounts under-withheld. That can get hefty.

To avoid this, you need at least 100% your previous year’s tax liability or 90% of your current year’s tax liability withheld from your paychecks. If you had an AGI of $150k or more (or $75k if married filing separately), you need to withhold least 110% of your previous tax year’s liability or 90% of your current tax year’s liability.

There is some wiggle room – the IRS is supposedly more lenient if the underpaid amount is $1000 or less. Of course, this is not guaranteed.

Employers should try their best to avoid this fine for you, but surprises can come especially if you have alternative income sources or you’re self-employed. Take a glance at your income statements – make sure you’re on track to avoid a surprise next tax season!

Happy Conforming (to IRS rules and standards),

TheJKW

Disclaimer: This blog, TheJKW, does not provide tax, legal or accounting advice. This website has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.