Estimated Payments & Avoiding Penalties

👎 What Are The Most Common Tax Penalties?

1. Failure-to-File Penalty – You file your tax return after the due date (including extensions).

• Amount: 5% of the unpaid tax per month, up to a maximum of 25%.

• Note: Usually the most expensive penalty. If you can’t pay, it’s still better to file on time without payment.

2. Failure-to-Pay Penalty – You don’t pay the tax you owe by the deadline.

• Amount: 0.5% of the unpaid tax per month (or part of a month), up to 25%.

• Tip: If both the Failure-to-File and Failure-to-Pay penalties apply in the same month, the IRS reduces the Failure-to-File penalty by the Failure-to-Pay amount for that month.

3. Estimated Tax Penalty – You don’t pay enough tax during the year through withholding or estimated payments.

• Amount: Interest-like calculation based on the underpayment amount and IRS interest rates.

• Tip: Avoid this by paying at least the lesser of:

  • 90% of the current year’s tax, or

  • 100% of the prior year’s tax (110% if high-income)

4. Early Retirement Withdrawal – You withdraw before age 59 1/2.

• Amount: 10% of amount withdrawn(You also owe income tax on any gains earned).

• Tip: Some limited exceptions apply. Medical expenses. First time home buyers.

5. Excess Retirement Contributions – You contribute more than is allowed.

• Amount: 6% per year until fixed.

• Tip: You have until April 15th of following year. Complete your tax return first & ask your tax pro for the best contribution options. (See our Retirement Accounts guide.)