Paying those quarterly estimated taxes on the 15th of April, June, September & January can get awfully annoying. As a side note, estimated taxes are pretty much a requirement by the government for those that are self employed or have a lot of investment income.

But still, why do you have to pay estimated taxes?
Think about it like this — it’s equivalent to taxes being withheld from your paycheck if you were employed by a company for the income you earn.

In terms of figuring out the EXACT penalty if you underestimate your estimated quarterly taxes, it is hard to calculate without having all of the facts. But, we will go through the process on how the IRS calculates the penalty so you can understand.

Factors Impacting the Tax Penalty
Generally speaking, your penalty will be assessed based on the following factors:

1. The amount you underpaid
2. The timing of when your payment was due for each period and remained unpaid
3. An interest charge (which ranges approximately 4 to 5 percent as published by the IRS on a quarterly basis).

In basic terms, this means that you will be charged an interest penalty for failure to make proper payment on time. Please note that “catching up” in the fourth quarter for the total underpayment would not eliminate penalties for being late in the first, second and/or third quarters.

Estimated payment penalties are assessed on each of the four quarters of the year. So if you make additional payment in the fourth quarter to compensate for the shortfall in the prior three quarters, you will still be assessed a penalty since proper payment was past due for the first three quarters.

If you are interested in calculating the actual penalty yourself you would need to complete IRS Form 2210. IRS Form 2220 is used for calculating the penalty for corporations.

Good luck and continue trying to paying the right amount of estimated taxes on time. Also, let us know if you have any additional tax questions.

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