We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is an Estimated Tax Penalty?

By Christopher John
Updated: May 17, 2024
Views: 5,473
Share

An estimated tax penalty is a fine that the Internal Revenue Service (IRS) or another tax collecting agency charges when a person underpays estimated taxes or fails to pay these taxes on time. Individuals must pay estimated taxes on income that is not subject to automatic withholding such as self-employment income or interest income. The purpose of the estimated tax penalty is to induce individuals to pay taxes voluntarily. Certain situations may allow a person to obtain a waiver to avoid having to pay this penalty. 

In the U.S., residents must pay taxes on their income as they earn or receive it. Ordinarily, an employer withholds certain taxes from an employee’s income and sends it to the IRS. This does not occur with all types of earnings. In general, no one automatically withholds taxes from self-employment income, interest, dividends, rental income, alimony, or other types of earnings. This income may be subject to taxation, which means the person receiving it must pay estimated taxes on it or face an estimated tax penalty.

To avoid the penalty in the U.S., a person must pay taxes on time and in the correct amount. Estimated taxes are due on the 15th day of April, June, September, and January. The taxes are due on time for each tax period, which means you cannot make up for an underpayment in one period by paying extra in a following period. A late payment or an underpayment results in an estimated tax penalty. 

The IRS sometimes grants waivers of the estimated tax penalty under certain circumstances. For instance, a person may qualify for a waiver if he suffered an accident, disaster, or faced a serious circumstance that prevented him from making the payment. Additionally, if a person suffers a disability or retires after reaching the age of 62 on the year before or on the year when estimated taxes were due, he may qualify for a waiver. Individuals must submit a special form available through the IRS to request a waiver. Essentially, the waiver of the estimated tax penalty is to prevent unfairness to individuals who failed to make payments due to circumstances beyond their control.

The IRS provides form 2210 to calculate the estimated tax penalty. It is a complex form; taxpayers may instead choose to allow the IRS to calculate the penalty and send them a bill for the penalty. Of course, anyone may also hire a tax accountant to do the calculations. A tax professional is also likely to know how to help structure payment of taxes to avoid the estimated tax penalty going forward.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-is-an-estimated-tax-penalty.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.