Underpayment penalty screen

[Rockpowwer]

This year is the first time I noticed this screen. Any idea where to start looking at what I means ?

Underpayment Penalties

You have a penalty of $91 for underpayment of your estimated taxes. The balance due on your return includes this penalty.

[VolvoGirl]

Do you have a penalty on 1040 line 38?  It's not for filing or paying late.  It doesn't have to do with last year's tax return or not paying estimates for this year.  The penalty is an "estimated" amount.    It's a penalty if you owe too much or for not paying in enough withholding during the year or not paying in evenly.  Even if you are getting a refund you can still owe a penalty.  It's very common and normal and expected for the IRS or state to bill you for more or send you a refund.

You might be able to eliminate it or at least reduce it.  You can go to Federal Taxes tab or Personal tab, under Other Tax Situations and select Start by the Underpayment Penalties. You will answer a series of questions that may reduce or eliminate the penalty. Or you can elect to have the IRS figure the penalty for you.  It's form 2210.

It's under

Federal or Personal (for Home & Business Desktop)

Other Tax Situations

Additional Tax Payments

Underpayment Penalties - Click the Start or update button

[MonikaK1]

If TurboTax is showing an underpayment penalty on your return, visit or revisit the Underpayment Penalty section under Other Tax Situations and answer the interview questions. The penalty calculation may change based on your answers, including information about when your withholding was applied. In addition, if you believe you qualify for a waiver of the penalty, you can request a waiver in that section.

The IRS may reduce an underpayment penalty if any of the following apply:

• You or your spouse (if you file a joint return) retired in the past 2 years after reaching age 62 or became disabled and you had reasonable cause to underpay or pay your estimated tax late. See Waiver of Penalty in Instructions for Form 2210PDF.
• You had most of your income tax withheld early in the year instead of spreading it equally through the year. 
• Your income varies during the year. Complete Form 2210, Schedule AI, Annualized Income Installment Method PDF(found within the form).

The penalty for underpayment of estimated tax can also be removed to the extent that the underpayment is the result of a casualty, local disaster, or other unusual circumstance such that it would not be fair to impose the penalty.

See here for information about different TurboTax tools you can use to calculate withholding and estimated taxes

@Rockpowwer 

[Rockpowwer]

Thanks. I’m starting to go over the interview inside that section and it’s definitely a bit above my head for now. But the goal was to just understand where it came from. Like was it just the w2, or after adding business income, or maybe it knows about k1s from last year (I’ve yet to add any k1 for the current period). 

[DawnC]

Given only the information you entered so far, you did not pay enough estimated taxes for your business income or did not have enough withholding taken out during the year by your employer.  Did you pay any estimated taxes for your business income?   Don't worry about the penalty section until you have everything entered as the amount will likely change as you add information.   If you did make estimated payments and need to enter them, see this TurboTax FAQ 

It is dependent on your income and timing of your tax payments/withholdings.  The IRS levies underpayment penalties if you don't withhold or pay enough tax on income received during each quarter. Even if you paid your tax bill in full by the April deadline or are getting a refund, you may still get an underpayment penalty.   

Example from this TurboTax FAQ:  Taylor is self-employed and estimated next year's tax bill at $20,000. Rather than making 4 quarterly payments of $5,000 each, they chose to pay $500 in each of the first 3 quarters, and the remaining $18,500 in the fourth quarter.    When they filed, their actual tax bill came to $17,270 and they got a $2,730 refund. However, Taylor got hit with the underpayment penalty, because they underpaid their estimated tax in the first 3 quarters.    More on Underpayment Penalties; Topic 306.

[Rockpowwer]

I think this might be due to business income, as w2 is usually ok for me each year. This is the first year the business made income and this is the first time i see this underpayment screen. I did not pay any taxes ahead during the year on this business income. That might be the issue? If so how does this work when there are more expenses than income, so in this case should I still be paying quarterly taxes on business income? During the year I knew there will be more expenses than income based on trend so the earning would be offset by losses. Wouldn't that mean there should be no net income and no taxes due?

[IsabellaG]

Yes, absolutely! If this was the first time your business showed a profit and you didn't make any estimated payments to cover the additional tax, this could be the first time you are seeing an underpayment penalty. 

No, if your expenses exceed your income for your business, you wouldn't need to pay estimated tax for that income, because there would be no additional taxes due.

[Rockpowwer]

OK then I guess we're back at why this penalty is showing, since the expenses are greater than revenue. W2 is fixed withholdings throughout the year, so not too sure what else could be. 

To test where this might be coming from, I removed the income from the business and when going back to the 

Underpayment Penalties screen, the penalty amount is now a bit lower.. Does this mean the underpayment is from multiple income streams?

Could it also be from Investments and Savings section?

[RobertB4444]

Penalties are based on your prior years' taxes.  If you owed $3,000 last year and then you owe $3,000 again this year then you're going to get charged a penalty.  The IRS sees that as money that you should have paid in estimated payments because - since you owed it last year - you should have known that you would owe it again.  And they expect to be paid not when your tax return is due but when you earn the money just like with withholding from a paycheck.

So if you owed last year and then owe again this year - no matter what revenue stream caused you to owe the money - there will be a penalty generated by the system.

@Rockpowwer 

[Rockpowwer]

The problem is that I did not owe last year. 2024 is the first tax year with business revenue (no net income). So I guess I am still confused. From prior years there was no underpayment penalty and W2 was fixed as well :(

[SharonD007]

After going through the Underpayment Section in TurboTax, if you still show an Underpayment Penalty, you can contact the IRS to request a one-time abatement of your underpayment penalty. For individual tax returns, call 1-800-829-1040, 7 AM - 7 PM Monday through Friday local time.

For more information, refer to the TurboTax help article Guide to IRS Tax Penalties: How to Avoid or Reduce Them for tips to use in the future.

@Rockpowwer 

[Rockpowwer]

Thank you. I will see if the penalty will get removed but my main goal is to try to avoid it next year.
So what would you advice to avoid it based on the information provided? Specifically, maybe we should focus on my disregarded LLC that I report on schedule-c. If the LLC is expected to have more expenses than revenue, do I still have to pay taxes quarterly when there will be no profit? Wondering it that will help avoid penalties. 

[MarilynG1]

If you're self-employed, it's a good idea to make quarterly estimated payments to avoid an underpayment penalty. You can take your 2024 income, divide by four and use that amount as a guide on the Annualized Income Worksheet in the Underpayment Penalties section, or here's a link to an IRS Worksheet (see page 9).

If you believe your income will be less in 2025, you can pay a lesser amount each quarter than what you calculated on the worksheet, but making a payment each quarter is recommended.

Here's more info on Form 2210.

@Rockpowwer 

[Rockpowwer]

thanks. 

when you say "income" in 2025, do you mean just the LLC and not income from W2, correct? and is that net income? because the LLC alone will not have a profit for each quarter and for the entire year as it is still running with more expenses than revenue. Do I still have to pay estimated taxes quarterly this year?

[MaryK4]

The penalty is based on your total income, but because you have withholding from your W2, you can reduce the estimated taxes you have to pay by that amount.  @Rockpowwer