Paying estimated taxes is an essential responsibility for freelancers, business owners, gig workers, and others with untaxed income. But what happens if you didn’t pay enough throughout the year? Whether it was an honest mistake or unexpected income changes, here’s what you need to know—and do—if you underpaid your estimated taxes.
1. Understand Why It Matters
The U.S. tax system is pay-as-you-go. This means you’re expected to pay taxes as you earn income—not just at tax time. If you don’t withhold enough through employer payroll or estimated payments, the IRS may charge a penalty for underpayment, even if you’re due a refund.
2. Determine How Much You Owe
First, figure out how short you fell. To do this:
- Review IRS Form 1040-ES or your tax software’s estimate for the current year.
- Calculate how much you’ve paid through estimated taxes or withholding.
- Subtract that from your total expected tax liability.
You’ll owe the difference plus any applicable penalties or interest.
3. Act Quickly: Make a Payment
If it’s still within the tax year, you can reduce penalties by making a catch-up estimated payment via the IRS’s Direct Pay system or through the Electronic Federal Tax Payment System (EFTPS).
If it’s already past year-end, you can still:
- Pay the balance due when you file your tax return.
- Consider applying any refund from prior years toward your current tax bill.
4. File Form 2210 (If Required)
Form 2210 helps the IRS calculate whether you owe a penalty for underpayment. In many cases, tax software will fill this out automatically. However, you may qualify for a waiver if:
- You had a casualty, disaster, or other unusual circumstance.
- You retired after age 62 or became disabled during the tax year and didn’t make the error on purpose.
5. Avoid It Next Year
To avoid penalties in the future, take these steps:
- Use the safe harbor rule:
- Pay at least 90% of the current year’s tax, or
- Pay 100% of last year’s tax (110% if your adjusted gross income was over $150,000).
- Update your estimated payments each quarter as your income changes.
- If you have a job with withholding, adjust your W-4 to have more tax taken out to cover other income sources.
- Use a quarterly payment schedule: Estimated taxes are due April 15, June 15, September 15, and January 15 (of the following year).
6. Consult a Tax Professional
If you’re unsure how much to pay or how to handle a penalty, a CPA or tax advisor can provide personalized guidance. This is especially useful if your income is unpredictable or if you’ve received a penalty notice from the IRS.
Final Thoughts
Underpaying estimated taxes isn’t the end of the world—but ignoring it can lead to costly penalties. Address the shortfall quickly, understand your options, and make a plan to stay on top of payments going forward. A little attention now can save you time, stress, and money later.