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Underpayment Penalty: What It Is, How to Avoid It
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do not influence our editors’ opinions or ratingsUnderpayment Penalty: What It Is, How to Avoid It
Taxpayers who don’t pay their full tax bill by the filing deadline are subject to a 7% underpayment interest fee, among other penalties.
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2 years of experience Expertise Personal income taxes Investing basics Investment fundsBella Avila is a content management specialist on the investing and taxes team at NerdWallet. Previously, she was a copy editing intern at NerdWallet through the Dow Jones News Fund internship program. Bella graduated from The University of Oklahoma with a bachelor's degree in journalism. She lives in Minneapolis, Minnesota.
Bella Avila is a content management specialist on the investing and taxes team at NerdWallet. Previously, she was a copy editing intern at NerdWallet through the Dow Jones News Fund internship program. Bella graduated from The University of Oklahoma with a bachelor's degree in journalism. She lives in Minneapolis, Minnesota. Content Management Specialist + more + more
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Pamela de la Fuente is a managing editor of NerdWallet's personal finance content. She leads budgeting, money-making, consumer credit and and debt coverage.Ask her and her talented team about why credit scores matter, how to save money on your grocery bill, finding the right side hustle, how to protect your identity for free and more.
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What is an underpayment penalty? What is an underpayment penalty? IRS underpayment penalty rate IRS underpayment penalty rate How to avoid the underpayment penalty How to avoid the underpayment penalty Exceptions to the underpayment penalty Exceptions to the underpayment penalty If you can’t pay your bill on time … If you can’t pay your bill on time …Table of Contents
What is an underpayment penalty? What is an underpayment penalty? IRS underpayment penalty rate IRS underpayment penalty rate How to avoid the underpayment penalty How to avoid the underpayment penalty Exceptions to the underpayment penalty Exceptions to the underpayment penalty If you can’t pay your bill on time … If you can’t pay your bill on time …What is an underpayment penalty?
What is an underpayment penalty?An underpayment penalty is a charge the IRS imposes on taxpayers who did not pay all of their estimated income taxes for the year or paid their taxes late. You’ll face an underpayment penalty if you:
An underpayment penalty is a charge the IRS imposes on taxpayers who did not pay all of their estimated income taxes for the year or paid their taxes late. You’ll face an underpayment penalty if you:Didn’t pay at least 90% of the tax on your current-year return or 100% of the tax shown on the prior year’s return.
Didn’t pay at least 90% of the tax on your current-year return or 100% of the tax shown on the prior year’s return.Paid your estimated taxes late.
Paid your estimated taxes late.If you work for an employer, you may be hit with this penalty because the tax that was withheld from your paycheck during the year didn’t cover your full tax liability. If you’re an independent contractor, you may be penalized for missing or underpaying one of the quarterly estimated tax payments.
If you work for an employer, you may be hit with this penalty because the tax that was withheld from your paycheck during the year didn’t cover your full tax liability. If you’re an independent contractor, you may be penalized for missing or underpaying one of the quarterly estimated tax payments .This penalty only applies to those who owe $1,000 or more in unpaid taxes. If you’re subject to this charge, you’ll receive an IRS notice in the mail.
This penalty only applies to those who owe $1,000 or more in unpaid taxes. If you’re subject to this charge, you’ll receive an IRS notice in the mail.Note that there are special rules for taxpayers whose adjusted gross income for the previous year was more than $150,000 (or $75,000 if married filing separately). Rather than 100%, you must have paid 110% of the tax on your prior year’s return to avoid the underpayment penalty.
Note that there are special rules for taxpayers whose adjusted gross income for the previous year was more than $150,000 (or $75,000 if married filing separately). Rather than 100%, you must have paid 110% of the tax on your prior year’s return to avoid the underpayment penalty.» MORE: What happens if you don’t pay taxes by the deadline?
» MORE: » MORE: What happens if you don’t pay taxes by the deadline?IRS underpayment penalty rate
IRS underpayment penalty rateThe underpayment penalty is calculated by multiplying how much tax you owed for each quarter by the interest rate for that quarter.
The underpayment penalty is calculated by multiplying how much tax you owed for each quarter by the interest rate for that quarter.This quarter (January through March), the underpayment penalty interest rate is 7%, which remains the same as it was throughout 2025.
This quarter (January through March), the underpayment penalty interest rate is 7%, which remains the same as it was throughout 2025.Quarter
Quarter
QuarterRate
Rate
RateJanuary - March 2026
January - March 20267%
7%October - December 2025
October - December 20257%
7%July - September 2025
July - September 20257%
7%April - June 2025
April - June 20257%
7%How to avoid the underpayment penalty
How to avoid the underpayment penaltyIf you paid at least 90% of the tax on your current-year return or 100% of the tax shown on the prior year’s return, you can avoid the underpayment penalty for estimated taxes.
If you paid at least 90% of the tax on your current-year return or 100% of the tax shown on the prior year’s return, you can avoid the underpayment penalty for estimated taxes.Another way to avoid an underpayment penalty in the future is to adjust your withholdings on your W-4 if you have an employer. Reducing your number of dependents or adding an extra withholding amount on line 4(c) can help ensure you’re having enough tax withheld from your paycheck to cover your tax bill. You can use the IRS withholding estimator to check whether you're on track.
Another way to avoid an underpayment penalty in the future is to adjust your withholdings on your W-4 if you have an employer. Reducing your number of dependents or adding an extra withholding amount on line 4(c) can help ensure you’re having enough tax withheld from your paycheck to cover your tax bill. You can use the IRS withholding estimator to check whether you're on track.If you’re an independent contractor who pays quarterly estimated taxes, stay on top of each quarter's due date, and make sure you’re accurately calculating and paying what you owe to avoid the underpayment penalty.
If you’re an independent contractor who pays quarterly estimated taxes, stay on top of each quarter's due date, and make sure you’re accurately calculating and paying what you owe to avoid the underpayment penalty.» Learn more: Tips for finding a tax preparer near you
» Learn more: » Learn more: Tips for finding a tax preparer near you AD Get reliable back tax relief with our team of A+ rated tax professionals Trusted & Top-Rated Nationwide — 4.9★ Google rating. Learn moreon Priority Tax Relief's website
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Exceptions to the underpayment penalty
Exceptions to the underpayment penaltyThe IRS may waive an underpayment penalty under certain circumstances, such as if you:
The IRS may waive an underpayment penalty under certain circumstances, such as if you:Had the majority of your income tax withheld at the beginning of the year.
Had the majority of your income tax withheld at the beginning of the year.Have varying income throughout the year.
Have varying income throughout the year.Became disabled and had reasonable cause to underpay.
Became disabled and had reasonable cause to underpay.Retired in the past two years after reaching age 62 and had reasonable cause to underpay.
Retired in the past two years after reaching age 62 and had reasonable cause to underpay.Went through an unforeseen circumstance, such as a local disaster or a casualty.
Went through an unforeseen circumstance, such as a local disaster or a casualty.Are a farmer or fisherman who paid all tax due by March 1.
Are a farmer or fisherman who paid all tax due by March 1.If you can’t pay your bill on time …
If you can’t pay your bill on time …You should still consider filing your tax return, even if you can’t afford to pay your bill. The IRS imposes a failure-to-file penalty on taxpayers who file late or don’t file, which is typically 5% of any unpaid taxes, up to a maximum of 25%.
You should still consider filing your tax return, even if you can’t afford to pay your bill. The IRS imposes a failure-to-file penalty on taxpayers who file late or don’t file, which is typically 5% of any unpaid taxes, up to a maximum of 25%.It’s also a good idea to pay as much as you can when you file. On top of the underpayment interest charge, you could face a late-payment penalty (also sometimes called the failure-to-pay penalty). This is an additional charge of 0.5% of any unpaid taxes for each month or partial month the tax goes unpaid, capped at 25% of your tax bill.
It’s also a good idea to pay as much as you can when you file. On top of the underpayment interest charge, you could face a late-payment penalty (also sometimes called the failure-to-pay penalty). This is an additional charge of 0.5% of any unpaid taxes for each month or partial month the tax goes unpaid, capped at 25% of your tax bill.If this all sounds a bit overwhelming, there is some good news: The IRS offers payment plans that allow taxpayers to pay their bill over time. Getting on a payment plan can help reduce penalties (for instance, the late-payment penalty is cut in half), and it can prevent a tax levy or lien.
If this all sounds a bit overwhelming, there is some good news: The IRS offers payment plans that allow taxpayers to pay their bill over time. Getting on a payment plan can help reduce penalties (for instance, the late-payment penalty is cut in half), and it can prevent a tax levy or lien.» MORE: How payment plans work, and how to set one up
» MORE: » MORE: How payment plans work, and how to set one up About the author Bella Avila Bella Avila Bella Avila is a content management specialist on the investing and taxes team at NerdWallet. See full bio.Helpful resources
Helpful resources How Federal Tax Brackets and Rates Work Capital Gains Tax: Long and Short-Term Rates for 2025-2026 How to Fill Out Your W-4 Form and When to Adjust It More like this Taxes 2026 Tax Brackets and Federal Income Tax Rates The IRS adjusts the federal tax brackets annually to keep pace with inflation. The 2026 tax brackets apply to taxes filed in 2027. Bella Avila Standard Deduction for 2025 and 2026: Amounts, When to Take The standard deduction is a popular way for taxpayers to reduce their taxable income. Your deduction amount depends on your age, filing status and other factors. 2 By Sabrina Parys, Tina Orem Capital Gains Tax: Long and Short-Term Rates for 2025-2026 Capital gains are the profits from the sale of assets. They can be subject to short-term or long-term tax rates. 2 By Sabrina Parys, Tina Orem 25 Popular Tax Deductions and Tax Breaks for 2025-2026 A deduction cuts the income you're taxed on, which can mean a lower bill. A credit cuts your tax bill directly. Learn more about common tax breaks and write-offs — and how to claim them. 2 By Sabrina Parys, Tina Orem Federal Income Tax Calculator and Refund Estimator 2025-2026 Estimate your 2026 tax refund or bill using our free income tax calculator. Enter your income, age and filing status to get started. Sabrina Parys How Federal Tax Brackets and Rates Work Contrary to popular belief, your income isn't taxed at just one rate. The U.S. has a progressive tax system, meaning different portions of your income get taxed at different rates. 2 By Sabrina Parys, Tina Orem 2025 Tax Brackets and Federal Income Tax Rates The 2025 federal income tax rates range from 10% to 37% and apply to taxes due by April of this year. Find out which bracket you're in. Bella Avila 2026 Tax Brackets and Federal Income Tax Rates The IRS adjusts the federal tax brackets annually to keep pace with inflation. The 2026 tax brackets apply to taxes filed in 2027. Bella Avila Standard Deduction for 2025 and 2026: Amounts, When to Take The standard deduction is a popular way for taxpayers to reduce their taxable income. Your deduction amount depends on your age, filing status and other factors. 2 By Sabrina Parys, Tina Orem Capital Gains Tax: Long and Short-Term Rates for 2025-2026 Capital gains are the profits from the sale of assets. They can be subject to short-term or long-term tax rates. 2 By Sabrina Parys, Tina Orem 25 Popular Tax Deductions and Tax Breaks for 2025-2026 A deduction cuts the income you're taxed on, which can mean a lower bill. A credit cuts your tax bill directly. Learn more about common tax breaks and write-offs — and how to claim them. 2 By Sabrina Parys, Tina Orem Federal Income Tax Calculator and Refund Estimator 2025-2026 Estimate your 2026 tax refund or bill using our free income tax calculator. Enter your income, age and filing status to get started. Sabrina Parys How Federal Tax Brackets and Rates Work Contrary to popular belief, your income isn't taxed at just one rate. The U.S. has a progressive tax system, meaning different portions of your income get taxed at different rates. 2 By Sabrina Parys, Tina Orem 2025 Tax Brackets and Federal Income Tax Rates The 2025 federal income tax rates range from 10% to 37% and apply to taxes due by April of this year. Find out which bracket you're in. Bella Avila 2026 Tax Brackets and Federal Income Tax Rates The IRS adjusts the federal tax brackets annually to keep pace with inflation. The 2026 tax brackets apply to taxes filed in 2027. Bella Avila Standard Deduction for 2025 and 2026: Amounts, When to Take The standard deduction is a popular way for taxpayers to reduce their taxable income. Your deduction amount depends on your age, filing status and other factors. 2 By Sabrina Parys, Tina Orem Capital Gains Tax: Long and Short-Term Rates for 2025-2026 Capital gains are the profits from the sale of assets. They can be subject to short-term or long-term tax rates. 2 By Sabrina Parys, Tina Orem 25 Popular Tax Deductions and Tax Breaks for 2025-2026 A deduction cuts the income you're taxed on, which can mean a lower bill. A credit cuts your tax bill directly. Learn more about common tax breaks and write-offs — and how to claim them. 2 By Sabrina Parys, Tina Orem Get started Get startedon Larson Tax Relief's website
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