Whether you file your return by April 15 or choose to extend it, one thing does not change: Your tax liability is still due on April 15. An extension to file is not an extension to pay. Failing to understand that distinction—or misunderstanding how the IRS measures whether you have paid enough throughout the year—is one of the most common and costly mistakes taxpayers make. Below is a practical breakdown of the key penalties, how they work, and how to avoid them.

Partner with your tax preparer

Before diving into the mechanics of penalties, the most important piece of advice is this: Your tax preparer should not be someone you speak with only when you drop off documents and pick up your return. Tax planning is a continuous process, and the value of an ongoing relationship with a qualified preparer compounds over time.

Yes, that level of engagement typically costs more. But for taxpayers with variable income from multiple sources—a business, equity compensation, investment accounts, private equity interests, or rental properties—a proactive relationship with your preparer can more than pay for itself by identifying issues before they become penalties.

Understanding the two types of tax penalties

It helps to think about IRS penalties in two distinct categories:

  1. What you owed during the year but didn’t pay. This is the underpayment penalty. The IRS expects taxpayers to pay their taxes as income is earned, not just in one lump sum at filing. When payments fall short of required thresholds during the year, the IRS assesses a penalty calculated quarter by quarter, with interest running from the due date of each underpaid installment.
  2. What you owed on April 15 but didn’t pay. Once your tax return is filed, whether extended or not, any remaining unpaid balance accrues a failure-to-pay penalty plus daily interest until the balance is satisfied. These charges run separately from, and in addition to, any underpayment penalty already assessed. There is also a failure-to-file penalty if an extension was not filed in a timely manner.

Examples of both penalties

Underpayment penalty: A taxpayer owes $40,000 in total federal tax for the year. They made no estimated payments and had only $28,000 withheld from their paycheck. Their prior-year tax was $35,000, so the 100% safe harbor would require $35,000 in payments. The taxpayer paid $28,000—a $7,000 shortfall. The IRS calculates the underpayment penalty on that $7,000 gap quarter by quarter, starting from the first quarterly due date when the shortfall appeared and running through April 15.

Failure-to-pay penalty plus interest: A taxpayer files their return on April 15 showing a $5,000 balance due but does not pay it until June 15. The IRS charges a failure-to-pay penalty of 0.5% per month (up to 25%) on that $5,000, plus daily compounding interest at the current IRS rate (the federal short-term rate plus 3%) from April 15 through the date of payment.

What is the safe harbor, and why does it matter?

The safe harbor is one of the most valuable and underutilized provisions in the tax code. It protects taxpayers from the underpayment penalty even if they end up owing a substantial amount when their final tax bill is calculated on April 15. To qualify, a taxpayer must pay the lesser of two thresholds during the year:

  • 90% of the current year’s actual tax liability, or
  • 110% of the prior year’s tax liability

For taxpayers with an adjusted gross income below $150,000 on a joint return, or $75,000 for single or married filing separately, the prior-year threshold is reduced to 100% of last year’s liability.

Here is why this matters practically: If you have a significant income event early in the year—a large bonus, a stock sale, or an unexpectedly profitable business quarter—but your withholding and equal estimated payments throughout the year still meet the 110% prior-year safe harbor, you will owe no underpayment penalty at all, even if you owe tens of thousands of dollars when you file. Knowing your prior-year liability and using it as your planning baseline is one of the simplest and most effective moves in tax management.

Key reminders for specific situations

W-2 earners: Use the withholding timing advantage

If you receive a W-2 with payroll withholding, you have a meaningful advantage that estimated-payment taxpayers do not: The IRS treats all W-2 withholding as if it were paid evenly throughout the year, regardless of when it was actually withheld. This creates a powerful late-year correction opportunity.

If you get to November or December and realize you have not withheld enough to meet your safe harbor, you can submit a new W-4 requesting additional withholding from your remaining paychecks. That supplemental withholding will be treated as though it was spread evenly across all four quarters, effectively backfilling underpaid earlier quarters and potentially eliminating the underpayment penalty entirely.

In contrast, estimated payments are locked to the quarter in which they are made. A large estimated payment in Q4 does not cure underpayments in Q1, Q2, or Q3—the penalty for those earlier quarters has already been accruing. If you are going to catch up late in the year, doing it through payroll withholding is almost always the more advantageous route unless the opportunity to annualize is more advantageous.

Business owners: Consider annualizing your income

The IRS’s default assumption is that income arrives evenly throughout the year (25% per quarter). For many business owners, that assumption is simply not accurate. Revenue may be seasonal, contract-driven, or heavily weighted toward a particular quarter.

If your income fluctuates from quarter to quarter, the annualized income installment method (computed on Schedule AI of Form 2210) allows you to calculate each quarter’s required payment based on actual income earned through that period rather than an assumed 25% share of your annual total. This can significantly reduce or eliminate penalties that would otherwise arise under the standard calculation, and it is a straightforward adjustment that your tax preparer can model for you. If your business income is genuinely uneven, annualization is one of the most practical tools available.

Natural disaster relief: An easy-to-miss provision

One lesser-known form of penalty relief comes from federally declared natural disasters. When the IRS grants disaster relief to affected areas, it typically extends deadlines for estimated tax payments and return filing—sometimes by several months. You do not have to be directly impacted by the disaster to qualify; the relief applies broadly to taxpayers located in the designated disaster area.

In 2025, widespread storms and other events triggered disaster relief in numerous states, providing eligible taxpayers with meaningful filing and payment extensions. If you live or operate a business in a frequently affected region, this is worth monitoring each year—and another reason to stay in regular contact with your tax preparer.

Tax penalties are not random—they follow predictable rules, and in most cases they are avoidable with the right planning. Know your prior-year liability, monitor your payments throughout the year, use withholding strategically when you can, and do not wait until April to have these conversations. The taxpayers who avoid surprises are almost always the ones who stayed engaged all year long.

If you have any questions about tax planning, reach out to your Cerity Partners advisor or request an introduction today.

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