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Avoiding the underpayment penalty for quarterly estimated tax payments

Here's the bad news: owing taxes when you file your tax return can result in underpayment penalties. The more you owe, the bigger the potential penalties.


Sean O’Keefe
Sean O’Keefe

Nov 27, 2020

1 min read
Avoiding the underpayment penalty for quarterly estimated tax payments

Do underpayment penalties effect me?

Many taxpayers with investments, like tech and startup employees, incur taxes from buying stock options, acquisitions, secondary transactions, or selling their shares on the public stock market. Here's the key question: Were any taxes withheld on these transactions?

Unlike your salary, most income from equity/investments don't have any taxes withheld and as a result you may owe money when you go to file your tax return at the end of the year.

Here's the bad news: owing taxes when you file your tax return can result in underpayment penalties. The more you owe, the bigger the potential penalties.

How do I know if I owe underpayment penalties?

The first step is to determine if you will owe taxes when you file your tax return or if you have a refund.

Can you avoid the tax underpayment penalty?

You can avoid underpayment penalties by:

  1. Making estimated payments
  2. Increasing the amount your employer withholds from your paycheck
  3. Penalty waiver

We'll breakdown these options separately for you

Make estimated payments

Generally, an underpayment penalty can be avoided if you use the Safe Harbor Rule for payments described below. The IRS will not charge an underpayment penalty if you pay at least:

       90% of the tax you owe for the current year, OR

       100% of the tax you owed for the previous tax year.

       (110% if you make more then $150k per year)

However, if you do not pay at least that much via quarterly estimated payments, you may be subject to an underpayment penalty.

Increasing the amount your employer withholds from your paycheck

Employers base taxes withheld from your paycheck on a W-4 that you submit when you join the company.

You can increase the amount that they withhold by resubmitting your W-4 to the payroll team at your company.

You can save a lot of money by avoiding underpayment penalties. Let us help you determine if you need to make estimated payments or increase your withholdings to avoid penalties.

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