The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.

It's entirely possible to get hit with an underpayment penalty even though you paid your tax bill in full by the April deadline or are getting a refund. 

Here's an example: Joe is self-employed and estimated next year's tax bill at $20,000. Rather than making 4 quarterly payments of $5,000 apiece, he chose to pay $500 in each of the first 3 quarters, and the remaining $18,500 in the fourth quarter.

When he filed, his actual tax bill came to $17,270 and he got a $2,730 refund. However, he got hit with the underpayment penalty because he underpaid his estimated tax in the first 3 quarters.

To reduce or possibly even eliminate your underpayment penalty, follow these instructions:

• Type annualizing your tax in the search bar and click search.
• Click on Jump to annualizing your tax.
• Continue with the onscreen interview until you get to the Annualized Income Method, click Yes.
• Enter your income in the boxes provided.

Continue with the onscreen interview until complete. 

You can actually add even more to your W-2 withholding by requesting an additional amount be deducted. See the screenshot of Form W-4.