Why am I getting an underpayment penalty if I'm getting a refund?

The IRS levies underpayment penalties if you don't withhold or pay enough tax on income received during each quarter. Even if you paid your tax bill in full by the April deadline or are getting a refund, you may still get an underpayment penalty.

To possibly reduce or eliminate your underpayment penalty, open your return in TurboTax and search for annualizing your tax (use this exact phrase). This will take you to the underpayment penalty section and we'll take you through the steps to possibly reduce what you owe.

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.