The income tax system is supposed to be pay as you go. You are required to pay your taxes more or less evenly during the year. if you are a W-2 employee, this is accomplished through your job withholding. If you are self-employed, you are required to make estimated payments for times a year to cover your taxes for that quarter. If you have a lump sum of income during the year, such as a large capital gain from the sale of investments or a home, you may be required to make an estimated payment for those taxes before the end of the quarter in which the income was received.
If you owe more than $1000 when you file your tax return, meaning that you did not pay enough into the system during the year, you will probably owe an underpayment penalty even if you pay in full when you file your tax return. Even if you owe more than $1000, you don’t owe the underpayment penalty if you paid at least 90% of what you owe this year into the system on time, or if your payments into the system this year were equal or more than 100% of last year’s tax liability (or 110%, depending on your income).
TurboTax’s formula for calculating the underpayment penalty is not always 100% correct. You can skip the underpayment penalty, and if you owe one, of the IRS will send you a bill. Or, if you include the underpayment penalty and the IRS decides you didn’t owe it, they will issue a refund.
