Underpayment Penalty
A tax penalty enacted on an individual for not paying enough of his or her total estimated tax and withholding. It is a penalty assessed by tax authorities when a taxpayer’s withholding and estimated tax payments (plus any overpayment from the prior year) are substantially less than the tax that is owed. The IRS does not assess an underpayment penalty when a taxpayer has paid at least 90% of the tax owed or when withholding plus estimated taxes paid equal 100% of the prior year’s tax liability.If an individual has an underpayment of estimated tax, they may be required to pay a penalty (on Form 2210).
To avoid an underpayment penalty you must pay either 100% of last year’s tax or 90 percent of this year’s tax by combining estimated and withholding taxes.