What Is Underpayment Tax?

Key Takeaways. An underpayment penalty is a fine levied by the IRS on taxpayers who don't pay enough of their estimated taxes or have enough withheld from their wages, or who pay late. To avoid an underpayment penalty, individuals must pay either 100% of last year's tax or 90% of this year's tax.

What does tax underpayment mean?

An underpayment of tax is when you have paid less tax than you were liable to pay. If you have paid too little tax you will owe Revenue the difference between what you actually paid and what you should have paid. ... Your tax credit certificate will show the tax credits that your employer is deducting from your tax bill.

What is the underpayment penalty for 2020?

The standard penalty is 3.398% of your underpayment, but it gets reduced slightly if you pay up before April 15. So let's say you owe a total of $14,000 in federal income taxes for 2020. If you don't pay at least $12,600 of that during 2020, you'll be assessed the penalty.