Underpayment of Estimated Tax Penalty – 2025 Overview
The IRS expects taxpayers to pay income tax as income is earned, either through withholding or quarterly estimated payments. If you don’t pay enough throughout the year, you may be subject to the Underpayment of Estimated Tax Penalty.
Who Is Affected?
This penalty applies to:
- Self-employed individuals and freelancers
- Small business owners
- Investors with significant income not subject to withholding
- Retirees with pension or investment income
- Employees with insufficient withholding
How the Penalty Works
The IRS calculates the penalty based on:
- Amount underpaid
- Length of time the payment was late
- Quarterly interest rate, which is 7% for 2025
Penalties are compounded daily, and interest may also be charged on the penalty itself.
Safe Harbor Rules to Avoid the Penalty
You can avoid the penalty if you meet one of the following:
- You owe less than $1,000 in tax after withholding and credits
- You paid at least 90% of your current year’s tax liability
- You paid 100% of last year’s tax liability (or 110% if your 2024 AGI was over $150,000)
Payment Deadlines for 2025
Estimated tax payments are due quarterly:
- April 15 – for income earned Jan–Mar
- June 15 – for income earned Apr–May
- September 15 – for income earned Jun–Aug
- January 15, 2026 – for income earned Sep–Dec
Special Considerations
- Withholding counts as paid evenly across quarters, even if done late in the year
- Form 2210 may be used to calculate or request a waiver of the penalty
- Annualized Income Installment Method can help if your income fluctuates seasonally
Penalty Relief May Be Available
You may qualify for relief if:
- You retired or became disabled in the past two years
- You experienced a casualty, disaster, or other unusual circumstance
- You relied on incorrect written advice from the IRS