First, you may want to address the question of whether the settlement is really taxable. Not all settlements are taxable, and it would be a shame for you to make the mistake of paying taxes when they were not owed.
Second, you can be hit with an underpayment penalty if you significantly under-pay your taxes during the year, even if you catch up and pay in full when you file your return. An underpayment penalty can sometimes occur if you have a large lump sum of income during the year. You can avoid the underpayment penalty by making an estimated payment at www.irs.gov/payments. Select “2021 estimated taxes“ from the drop-down menu.
As to whether or not you could have a penalty and how much tax to pay, the IRS will assess an underpayment penalty if you owe more than $1000 when filing your tax return, unless the payments and withholding you made during the year are at least 90% of your tax liability for 2021, or are at least 100% of your tax liability for 2020, or are at least 110% of your tax liability for 2020 if your adjusted gross income is more than $150,000. (Your tax liability is what you owed the government overall in taxes last year, and is not necessarily the amount of your final payment or the amount of your withholding. For example, if you had $6000 of withholding and received a $1000 refund, your tax liability last year was $5000.)
If your withholding plus any estimated payments you make is it at least 100% of last year‘s tax liability, you will not be assessed a penalty. If you do make an estimated payment, and you pay more than you owe, the difference would be added to your refund.
