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The underpayment penalty meaning defines a fine or a tax penalty that might be enacted or charged on an individual for not paying the total estimated tax, or is doing so inadequately. Form 2210 records the tax payments made, whereas Form 1040 or 1040A determines the underpayment penalty amount that the taxpayer is subject to.
The IRS (Internal Revenue Service) imposes several penalties on taxpayers for not paying their Taxes adequately. Such penalties are imposed to encourage the taxpayers to abide by the IRS rules.
The IRS will generally calculate the penalty for you. However, in certain situations, you might need to do it yourself on Form 2210 by subtracting the tax amount already paid throughout the year.
The underpayment penalty meaning might be applied in case the total of your estimated withholdings or payments (or both) is not less than -
90%
of the tax amount you owed for the current tax year.100%
of the taxes you paid last year.Let’s take an example to understand the underpayment penalty better-
Say for the current tax year, your federal income tax Obligation is Rs. 10,000. But you paid only
80%
of your total tax obligation, that’s Rs. 8,000. Then you are subject to an underpayment penalty.
On the following occasions, the IRS might waive the underpayment penalty.
90%
of the total tax amount owed.62 years
.If you do not qualify under the above exceptions, you would be subject to an underpayment penalty if you Fail to pay your estimated taxes adequately.
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You can follow a few steps to avoid underpayment penalties in the future. These include -
Makes estimated payments: If you have a side job or are self-employed, you may be required to calculate the total estimated tax payments throughout that tax year.
Adjust your W-4 withholding: In case, your employees are not paying their taxes enough, you might make up for the tax shortfall by updating your Form W-4 and asking your employees to withhold more.
Annualize your income: This option is best if your Income is seasonal or altogether unpredictable. By annualizing your income, you can base your tax payments on some reasonable income estimates.