Underpayment penalties are assessed if you don't withhold or pay enough tax on income received during each quarter.
In fact, it's entirely possible to get hit with an underpayment penalty even though you paid your tax bill in full by the May deadline or are getting a refund.
Example: Taylor is self-employed and estimated next year's tax bill at $20,000. Rather than making 4 quarterly payments of $5,000 apiece, 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.
Tip: To reduce or possibly even eliminate your underpayment penalty, search for annualizing your tax (use this exact phrase) inside TurboTax. This will take you to the underpayment penalty section and we'll take you through the steps to possibly reduce your underpayment penalty. (If you don’t see Jump to annualizing your tax in the search results, make sure you’re in your return and not on the Tax Home page.)