The IRS has a "pay as you go" system, which means you're supposed to pay taxes throughout the year as you earn or receive income, rather than sending a big lump sum to the IRS at the end of the year. If you owe more than $1,000 when you calculate your taxes, you could be subject to a penalty.
Ways to avoid an underpayment penalty:
- Pay at least 90% of the tax you owe for the current,
- Pay 100% of the tax you owed from the previous tax year,
- Owe less than $1000 in tax after subtracting the amount withheld and credits.