Underpayment Penalty: Rate, How It Works

Underpayment Penalty: What It Is, How to Avoid It

Taxpayers who don’t pay their full tax bill by the filing deadline are subject to a 7% underpayment interest fee, among other penalties.

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Updated Jul 8, 2026

What is an underpayment penalty?

An underpayment penalty is a charge the IRS imposes on taxpayers who did not pay all of their estimated income taxes for the year or paid their taxes late. You’ll face an underpayment penalty if you:

Didn’t pay at least 90% of the tax on your current-year return or 100% of the tax shown on the prior year’s return.
Paid your estimated taxes late.

If you work for an employer, you may be hit with this penalty because the tax that was withheld from your paycheck during the year didn’t cover your full tax liability. If you’re an independent contractor, you may be penalized for missing or underpaying one of the quarterly estimated tax payments.

This penalty only applies to those who owe $1,000 or more in unpaid taxes. If you’re subject to this charge, you’ll receive an IRS notice in the mail.

Note that there are special rules for taxpayers whose adjusted gross income for the previous year was more than $150,000 (or $75,000 if married filing separately). Rather than 100%, you must have paid 110% of the tax on your prior year’s return to avoid the underpayment penalty.

» MORE: What happens if you don’t pay taxes by the deadline?

IRS underpayment penalty rate

The underpayment penalty is calculated by multiplying how much tax you owed for each quarter by the interest rate for that quarter.

This quarter (July through September), the underpayment penalty interest rate is 7%, an increase of one percentage point from the previous quarter.

Quarter	Rate
July - September 2026	7%
April - June 2026	6%
January - March 2026	7%
October - December 2025	7%

How to avoid the underpayment penalty

If you paid at least 90% of the tax on your current-year return or 100% of the tax shown on the prior year’s return, you can avoid the underpayment penalty for estimated taxes.

Another way to avoid an underpayment penalty in the future is to adjust your withholdings on your W-4 if you have an employer. Reducing your number of dependents or adding an extra withholding amount on line 4(c) can help ensure you’re having enough tax withheld from your paycheck to cover your tax bill. You can use the IRS withholding estimator to check whether you're on track.

If you’re an independent contractor who pays quarterly estimated taxes, stay on top of each quarter's due date, and make sure you’re accurately calculating and paying what you owe to avoid the underpayment penalty.

» Learn more: Tips for finding a tax preparer near you

Exceptions to the underpayment penalty

The IRS may waive an underpayment penalty under certain circumstances, such as if you:

Had the majority of your income tax withheld at the beginning of the year.
Have varying income throughout the year.
Became disabled and had reasonable cause to underpay.
Retired in the past two years after reaching age 62 and had reasonable cause to underpay.
Went through an unforeseen circumstance, such as a local disaster or a casualty.
Are a farmer or fisherman who paid all tax due by March 1.

If you can’t pay your bill on time …

You should still consider filing your tax return, even if you can’t afford to pay your bill. The IRS imposes a failure-to-file penalty on taxpayers who file late or don’t file, which is typically 5% of any unpaid taxes, up to a maximum of 25%.

It’s also a good idea to pay as much as you can when you file. On top of the underpayment interest charge, you could face a late-payment penalty (also sometimes called the failure-to-pay penalty). This is an additional charge of 0.5% of any unpaid taxes for each month or partial month the tax goes unpaid, capped at 25% of your tax bill.

If this all sounds a bit overwhelming, there is some good news: The IRS offers payment plans that allow taxpayers to pay their bill over time. Getting on a payment plan can help reduce penalties (for instance, the late-payment penalty is cut in half), and it can prevent a tax levy or lien.

» MORE: How payment plans work, and how to set one up

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