The estimated tax penalty is interest the IRS charges when tax is paid too late within the year, even if the return is filed and fully paid by April. It is computed quarter by quarter on Form 2210: each installment shortfall accrues a charge at the federal underpayment rate (the short-term rate plus 3 percentage points, adjusted quarterly) from the installment due date until paid. Because it runs per quarter, a big January catch-up payment does not erase the charges that accrued from April, June, and September shortfalls. Withholding, unlike estimated payments, is treated as paid evenly through the year no matter when it happens, so a December bonus withholding or a year-end W-2 adjustment from the owner's own S corporation can retroactively cure earlier quarters. The annualized income method helps taxpayers whose income arrives unevenly, matching required installments to when income was actually earned.
Estimated Tax Penalty
Primary authority: IRC §6654; Form 2210
The authority behind it
IRC §6654; Form 2210
Every entry in this glossary cites the statute, regulation, or IRS guidance behind it.
Worked example
A business owner skips her June 15 installment of $20,000 and pays it with her return the following April. At an 8% annual rate, roughly ten months of interest, about $1,300, is added as a penalty for that quarter alone.
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