When you don't have enough tax withholding and you don't make estimated tax payments during the year, then the IRS or your state can charge you with an underpayment penalty. It is not the same as the interest or penalty the IRS will charge you for not paying your balance due on time (by April 15th).
This penalty generally only applies when you owe more than $1,000 in federal tax on your tax return. Basically, you get charged this penalty for owing too much tax and not making the proper payments during the year (either through withholding on your paycheck or estimated tax payments).
Here is an excerpt from the IRS -
"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. You can do this either through withholding or by making
estimated tax payments.
If you don't pay your tax or you pay an insufficient amount of tax through withholding, you might also have to pay estimated taxes. If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax."
If you have been assessed an underpayment penalty, then you can see if you may qualify for an exception to the penalty. You may want to look into these exceptions if this is the first year you owed tax and it is not a normal occurrence (i.e. you had one time income this year).
"Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and estimated tax payments, or if they paid at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller."
You can review the underpayment penalty section by using one of the following two methods
First, you can perform a search within the program.
- Log in and click Take Me to My Return
- Use the search icon in upper right-hand corner (magnifying glass icon)
- Search for “underpayment penalty”
- Click the “Jump to underpayment penalty” link
- This will take you directly to the section of the program where you can review the underpayment penalty and possibly qualify for an exception
Second, you can use a step by step method of getting to the same place above
- Log in and click Take Me to My Return
- Click Federal Taxes (Personal if in Self-Employed)
- Select Other Tax Situations
- Scroll down to Additional Tax Payments
- Click start/edit next to Underpayment Penalties
You can also choose to have the IRS figure out your penalty. Go through the above section for Underpayment Penalty and during that interview, one of the questions will ask if you would rather have the IRS calculate your penalty. Say Yes, and this will override any penalty TurboTax has calculated. If you are liable for a penalty, the IRS will send you a bill for this amount later.
