As an individual taxpayer, you can get hit with a healthy, non-deductible interest penalty if you fail to pay enough federal income tax in advance—including any self-employment tax and alternative minimum tax (AMT)—via withholding and/or timely estimated tax payments.1
You usually trigger the penalty when you miss an estimated tax payment. If that happens, what can you do about it? Good question. Please read this for the answers.
Estimated Tax Payment Basics
If you use the calendar year for federal income tax purposes, as almost everybody does, the due dates for quarterly estimated tax payments for your 2024 tax year are April 15, 2024; June 17, 2024; September 16, 2024; and January 15, 2025.
The due dates for quarterly estimated tax payments for your 2025 tax year are April 15, 2025; June 16, 2025; September 15, 2025; and January 15, 2026.
Best Ways to Pay
The best way for an individual taxpayer to make quarterly estimated federal income tax payments depends on convenience, security, and record-keeping preferences. Here are the most effective methods:
1. Online Payment through IRS Direct Pay
How it works: go to IRS Direct Pay and pay directly from your bank account.
Advantages:
- Free to use.
- Immediate confirmation of payment.
- Easy to schedule payments ahead of time.
Best for taxpayers who want a simple, fast, and secure option.
2. IRS Electronic Federal Tax Payment System (EFTPS)
How it works: register at EFTPS.gov, then make payments electronically from your bank account.
Advantages:
- Free service with secure online access.
- Allows scheduling payments in advance.
- Comprehensive payment history for record-keeping.
Best for taxpayers who want detailed tracking and a robust payment platform.
3. Pay Via IRS2Go Mobile App
How it works: use the IRS2Go app (available for iOS and Android) to make payments through Direct Pay or a credit/debit card.
Advantages:
- Convenient for mobile users.
- Same security features as IRS Direct Pay.
Best for tech-savvy taxpayers who prefer mobile transactions.
4. Pay by Debit or Credit Card or Digital Wallet
How it works: use an authorized payment processor listed on the IRS website to pay by card.
Advantages:
- Convenient if cash flow is tight.
- Possible credit card rewards.
Disadvantage:
- Service fees apply (varies by processor).
Best for taxpayers who prefer using credit/debit cards despite fees.
5. Mail a Check or Money Order
How it works: mail Form 1040-ES with a check or money order to the IRS.
Advantage:
- Familiar method for those uncomfortable with electronic payments.
Disadvantages:
- Risk of delays in processing or lost mail.
- No immediate confirmation of payment.
Best for taxpayers who prefer traditional methods or lack internet access.
Recommended Method
For most individuals, IRS Direct Pay and EFTPS are the best choices because they are secure and free and offer immediate payment confirmation. These methods also provide excellent record-keeping features critical for tax compliance and audit purposes.
Insufficient Estimated Tax Penalty Basics
If you are self-employed or operate your business as an S corporation, you likely need to make quarterly estimated tax payments. You get hit with a non-deductible penalty if you don’t make sufficient payments on time.
You might also need to make quarterly estimated tax payments if you have other income. For instance, you could have investment income from taxable brokerage firm accounts, pension income, taxable Social Security benefits, taxable retirement account withdrawals, or rental income with no or insufficient federal income tax withholding.
Penalty Rates
The penalty rate for insufficient estimated tax payments can change every quarter. The annual equivalent rate for the fourth quarter of 2024 is 8 percent. For the first, second, and third quarters of 2024, the rate was also 8 percent.
For the first quarter of 2025, the rate drops to 7 percent.3
Key point. The penalty is not deductible. If you are in the 37 percent tax bracket, the 8 percent penalty is 12.7 percent because you can’t deduct it.
Calculating the Penalty
When the penalty applies, you can calculate it using IRS Form 2210.
Alternatively, you can file your Form 1040 for the year, let the IRS calculate it, and send you a bill.
Period for Which the IRS Charges the Penalty
The period for which you suffer the insufficient estimated tax penalty starts on the due date for the quarterly payment and ends on the earlier of4
- April 15 of the following year or
- with respect to any portion of the underpayment, the date on which you pay such portion.
The IRS credits estimated tax payments against any unpaid required quarterly installments in the order that such installments were due.
Example. Catching Up for Missed Estimated Tax Payment
For 2024, your required quarterly estimated tax payments are $20,000. You made the payments for the first and second quarters on time but missed the third quarterly payment that was due on September 16, 2024. You’ll be assessed the penalty on $20,000 until you catch up.
For instance, if you catch up by making a $40,000 estimated tax payment on January 15, 2025, you’ll owe the penalty on $20,000 from September 16, 2024, through January 15, 2025.
If you make a $20,000 catch-up payment on December 5, 2024, the penalty stops running then.
If you don’t catch up by April 15, 2025, the penalty stops running, but you’ll start owing the failure-to-pay penalty, which equals 0.5 percent of the underpaid amount for each month until you cure the underpayment.
Key point. If you miss an estimated tax payment, you can stop the penalty from running by making a catch-up payment, but you can’t make the prior unpaid penalty go away. Sorry.
Exceptions to the Penalty for Underpayment of Estimated Tax
Some exceptions allow you to minimize or avoid the penalty for underpayment of estimated tax. The three most commonly used exceptions are explained immediately below. We assume in the remaining discussion that you have no federal income tax withheld. In other words, you pay all of your federal taxes via estimated tax payments.
Exception 1: Current-Year Tax Exception
There’s no penalty when you pay at least 90 percent of your current year’s tax, as shown on your Form 1040, via timely estimated tax payments. Timely means that your estimated payments are paid at a rate no less than 22.5 percent of your current-year tax by each of the four estimated tax payment deadlines. Remember that your tax amount includes your self-employment tax bill
Example. You correctly estimate that your current-year tax bill will amount to $80,000. You make on-time, quarterly estimated tax payments of $18,000 each, for a total of $72,000. Since $72,000 is 90 percent of $80,000, you don’t owe any insufficient estimated tax penalty for this year, thanks to the current-year tax exception.
Key point. To avoid the penalty in this example, your cumulative payments must be on time for each due date and must aggregate as follows:
- $18,000 with estimated tax payment 1
- $36,000 total with estimated tax payment 2
- $54,000 total with estimated tax payment 3
- $72,000 total with estimated tax payment 4
Exception 2: Prior-Year Tax Exception
There’s no interest charge penalty when you pay at least 100 percent of the tax shown on your Form 1040 for the previous year via timely estimated tax payments.
But if the adjusted gross income (AGI) shown on your prior-year return exceeded $150,000 ($75,000 if you use married filing separate status for the current year), you must pay 110 percent of the tax shown on your prior-year return to avoid the penalty under this exception.
To use the prior-year exception, make sure your cumulative payments are
- 25 (or 27.5) percent for installment 1,
- 50 (or 55) percent cumulative with installment 2,
- 75 (or 77.5) percent cumulative with installment 3, and
- 100 (or 110) percent cumulative with installment 4.
Example. Your 2023 tax bill was $80,000. Your 2023 AGI was more than $150,000.
You make on-time, quarterly estimated tax payments of $22,000 each for 2024—$88,000 total. Since $88,000 is 110 percent of your 2023 tax, you don’t owe any underpayment penalty for 2024, even if your 2024 tax is $103,000, thanks to the prior-year penalty exception. Well done!
Exception 3: Annualized Income Installment Method Exception
The two exceptions we just explained are pretty simple, and simple is good. If your income is not spread relatively evenly throughout the tax year, there’s another exception, but it’s not simple.
For instance, you may have a Schedule C, a partnership, or an S corporation business that throws off income on a seasonal basis. Or you may have a large capital gain late in the year. In these scenarios, you can use the annualized income installment method exception to avoid a penalty for underpayment of estimated tax by making unequal estimated tax payments that reflect the unequal timing of your income.
To take advantage of this exception, wrestle with IRS Form 2210.7 We’re directing you there because we didn’t want this article to turn into a book.
If you need to use the annualized income installment method exception, consider hiring a tax pro for help. Your brain will thank you.
Special Rules for Farmers and Fishermen
Special favorable estimated tax payment rules apply to farmers and fishermen. For details, see the instructions to IRS Form 2210-F (Underpayment of Estimated Tax by Farmers and Fishermen).
Takeaways
Don’t let the penalty for underpayment of estimated tax apply to you. The penalty is more expensive than it first appears because the penalty payment is not tax-deductible.
The only sure way to avoid the underpayment penalty is to make sufficient, on-time estimated tax payments. Choosing a payment method such as IRS Direct Pay or EFTPS and setting up your installments to pay on time helps avoid the penalty.
If you miss a payment or don’t pay enough on time, you can make a catch-up payment that stops the interest charge penalty from running. But you can’t make the penalty go away.
Make sure you understand the exceptions that allow you to avoid the underpayment penalty. Given that the time value of money is once again a consideration these days, the exceptions can come in handy.
