Paying tax late can cost you in three separate ways. They stack, so it's worth knowing which ones apply to you.
1. Underpayment of estimated tax
This applies when you didn't pay enough during the year, through withholding or quarterly estimated payments. It's figured like interest: the IRS underpayment rate (currently 7% a year, adjusted quarterly) on each quarter's shortfall, from its due date until paid.
Quarterly due dates are usually April 15, June 15, September 15 and January 15.
Safe harbors. You owe no underpayment penalty if you:
- owe less than $1,000 after withholding, or
- paid at least 90% of this year's tax, or
- paid 100% of last year's tax (110% if last year's AGI was over $150,000).
Most states have similar rules, though some differ. California, for example, front-loads its schedule (30% / 40% / 0% / 30%) and doesn't allow the prior-year safe harbor at very high incomes.
2. Failure to pay
If you file on time but don't pay the balance by the April deadline, the penalty is 0.5% of the unpaid tax per month, up to 25%. It drops to 0.25% a month while you're on an IRS payment plan. Interest also accrues.
An extension to file is not an extension to pay. Tax is still due in April.
3. Failure to file
Not filing by the deadline (or the extended deadline) costs 5% of the unpaid tax per month, up to 25%. It's ten times the failure-to-pay rate, so if you can't pay, file anyway.
Example
You have a $40,000 gain from an October stock sale and pay nothing until April. The fourth-quarter shortfall runs about three months, so at 7% a year the underpayment penalty is roughly $40,000 x 7% x 0.25 = about $700, assuming no safe harbor covers you. File late and unpaid on top of that, and failure-to-file adds 5% a month.
How to avoid them
- Pay an estimate in the quarter a big event happens (see too little tax taken out).
- Raise your paycheck withholding with W-4 Step 4(c). Withholding counts as paid evenly all year, so it can fix earlier quarters that an estimate can't.
- Aim for a safe harbor: often 110% of last year's tax is the easiest target.
- Always file on time, even if you can't pay in full.
- If you were penalized, ask about first-time penalty relief.
Our calculator shows your quarterly payment schedule and estimated penalty.
Frequently asked questions
Does filing an extension stop the late-payment penalty?
No. It stops the failure-to-file penalty, but tax is still due by the April deadline, and failure-to-pay plus interest start then.
What is the safe harbor for high earners?
If last year's AGI was over $150,000, paying 110% of last year's tax through withholding and estimates avoids the federal underpayment penalty.
Official sources (for the detail-minded)
- IRC §6654Underpayment of estimated tax
- IRC §6651Failure to file and failure to pay penalties
- IRS Form 2210Underpayment penalty computation
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