Updated October 24, 2026. Quick answer: IRS Tax Topic 306 covers the penalty for underpayment of estimated tax. It says most taxpayers will avoid the penalty if they owe less than $1,000 after withholding and refundable credits, or paid at least 90% of the current year tax or 100% of the prior year tax, whichever is smaller.
Quick reference
| Item | What the IRS topic says |
|---|---|
| How the system works | “you must pay income tax as you earn or receive your income during the year.” |
| Small balance test | “they either owe less than $1,000 in tax after subtracting their withholding and refundable credits” |
| Paid in enough test | “they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.” |
| Payment schedule | “Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty.” |
| Form to check the penalty | “Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts to see if you owe a penalty for underpaying your estimated tax.” |
Pay as you go
The IRS topic says “The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year.” It then says “You can do this either through withholding or by making estimated tax payments.”
On the penalty itself, it says “If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.”
The two ways to avoid the penalty
The IRS topic says “Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.”
It also notes “There are special rules for taxpayers with income from farming or fishing, certain household employers and certain higher income taxpayers.” For the estimate itself it points to “Form 1040-ES, Estimated Tax for Individuals.” On this site, Form 1040-ES and estimated tax due dates cover the payment side.
Timing, Form 2210 and the waiver
On timing, the IRS topic says “Generally, taxpayers should make estimated tax payments in four equal amounts to avoid a penalty.” It adds “However, if you receive income unevenly during the year, you may be able to vary the amounts of the payments to avoid or lower the penalty by using the annualized installment method.”
The topic names the form: “Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts to see if you owe a penalty for underpaying your estimated tax.”
On waivers, it says “The law allows the IRS to waive the penalty if:” and lists two cases. One is “You didn’t make a required payment because of a casualty event, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or” The other is “You retired (after reaching age 62) or became disabled during the tax year or in the preceding tax year for which you should have made estimated payments, and the underpayment was due to reasonable cause and not willful neglect.” See Form 2210 and Form 1040 line 38.
Where this comes from
This page describes the IRS page titled Topic no. 306, Penalty for underpayment of estimated tax, as served on irs.gov on October 24, 2026. The IRS page shows that it was last reviewed or updated on 24 Sep 2026. The IRS can change a topic after we read it, and the IRS page controls. General information, not tax or legal advice.
Common mistakes
- Reading the 90% test as the only test. The topic gives two routes: “owe less than $1,000” in tax, or “at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller”.
- Assuming the smaller figure is optional. The topic says “whichever is smaller.”
- Ignoring withholding. The topic counts both, saying “either through withholding or by making estimated tax payments”.
- Thinking the waiver is automatic. The topic says “The law allows the IRS to waive the penalty if:” and then names specific conditions.
Related: IRS tax topics by number, Form 1040-ES, Form 1040-ES estimated tax worksheet, Estimated tax due dates, Form 2210, Form 1040 line 38, estimated tax penalty, and Safe harbor estimated taxes in retirement.
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Answer againSources
- IRS, Topic no. 306, Penalty for underpayment of estimated tax (irs.gov): https://www.irs.gov/taxtopics/tc306
- IRS, Tax topics index (irs.gov): https://www.irs.gov/taxtopics
Read from the IRS pages linked above on October 24, 2026. General information, not tax or legal advice. The IRS topic page and the instructions for your own form control, and your own facts decide the outcome.