Tax Dictionary – Underpayment Penalty
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 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.
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If you didn’t pay enough taxes during the year by withholding taxes from your paycheck or by making estimated tax payments, the IRS may charge you a penalty for underpayment of your estimated taxes. This penalty can be avoided if:
- You owe less than $1,000 in tax, or
- You paid at least 90% of the tax you owe for the current year, or you paid 100% of the tax you owed for the prior year (whichever is less)
The penalty for not paying your tax balance in full by the filing deadline is called the failure to pay penalty.
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