Owing taxes this year does not automatically mean you have to repeat the same problem next year.
If you ended up with an unexpected tax bill, one of the smartest moves you can make now is to build a plan that helps you avoid IRS underpayment penalties in 2026. The key is building a strategy now so you can avoid IRS underpayment penalties in 2026 instead of reacting to another unexpected tax bill.
Many business owners and higher-income taxpayers are surprised to learn that the IRS does not just care whether you pay by the filing deadline. It also cares when the tax was paid during the year. That is where underpayment penalties come in.
The good news is that if you owe this year, you still have time to fix the pattern before it becomes more expensive next year.
Quick Answer
To avoid IRS underpayment penalties in 2026, you generally need to make sure enough tax is paid in throughout the year through withholding, quarterly estimated tax payments, or a combination of both. If you owed this year, that is often a sign your current tax payments are too low, uneven, or poorly timed. The best fix is to review your income early, project your tax liability, and adjust your plan before the next year gets away from you.
Why Taxpayers Fail to Avoid IRS Underpayment Penalties in 2026
A lot of taxpayers assume that as long as they pay their balance when they file their return, everything is fine.
That is not always true.
The IRS expects many taxpayers to pay taxes as income is earned, not just at the end of the year. When too little is paid during the year, the IRS may assess an underpayment penalty even if the full tax is eventually paid with the return.
This happens often with:
- business owners
- self-employed taxpayers
- S Corporation owners taking distributions
- real estate investors
- retirees with multiple income sources
- taxpayers with large capital gains
- people with side income or 1099 income
- taxpayers who had a big jump in income but never adjusted withholding
In other words, the problem is usually not just that someone owes. The problem is that their payment strategy was not keeping up with their income.
Common Reasons You May Owe This Year
If you are trying to avoid the same issue in 2026, start by identifying what caused the balance due this year.
1. Your withholding was too low
This is common when wages, spouse income, bonuses, retirement distributions, or Social Security withholding were not properly adjusted.
2. You did not make estimated tax payments
Self-employed taxpayers and business owners often need quarterly estimated payments. If those are missed or too low, the balance due can grow fast.
3. Your income increased
A better year in business, large asset sale, Roth conversion, or increased investment income can create a tax bill that your old payment system was never designed to handle.
4. You relied on last year’s results
A lot of people assume this year will look like last year. That works until profits rise, deductions change, or a one-time event pushes income much higher.
5. You took money out but did not reserve for taxes
This is especially common with business owners. Cash was available, so it got used for personal spending, debt payments, or reinvestment, but no tax reserve was set aside.
What the IRS Really Looks At
The IRS is not only measuring whether you paid enough by April. It is also measuring whether you paid enough during the year.
That matters because many taxpayers think they can just “catch up later.” Sometimes they can reduce the damage, but late catch-up payments do not always erase a penalty that already started building earlier in the year.
That is why tax planning needs to happen before year-end and, ideally, throughout the year to help taxpayers avoid IRS underpayment penalties in 2026.
IRS Safe Harbor Rules That Help Avoid Underpayment Penalties
The IRS provides “safe harbor” rules that allow taxpayers to avoid underpayment penalties even if they still owe taxes when they file their return.
In most cases, you can avoid IRS underpayment penalties in 2026 if one of the following is true:
• You paid at least 90% of your current year tax liability, or
• You paid 100% of last year’s total tax liability
Higher-income taxpayers have a slightly higher threshold:
• If adjusted gross income exceeds $150,000, the safe harbor increases to 110% of the prior year tax liability.
These rules are especially helpful for business owners whose income fluctuates from year to year.
However, relying only on the prior-year safe harbor may still leave a balance due at filing. That is why many taxpayers combine safe harbor payments with proactive tax projections during the year.
These safe harbor rules are outlined in IRS guidance for estimated taxes and are commonly used by taxpayers to prevent underpayment penalties when income varies during the year.
How to Avoid IRS Underpayment Penalties in 2026
Here is the practical part.
If you owe this year, these are the smartest ways to reduce the chance of penalties next year.
1. Review your 2025 tax return for the real cause
Do not just look at the amount due. Look at why it happened.
Questions to ask:
- Was withholding too low?
- Were quarterly payments missed?
- Did business profit increase?
- Did a spouse’s withholding create the issue?
- Was there a one-time event like a gain, conversion, or retirement distribution?
- Did you stop payroll or reduce your own wages too much in an S Corporation?
Until you identify the cause, it is easy to repeat the mistake.
2. Adjust withholding early
Adjusting withholding early in the year is one of the most reliable ways to avoid IRS underpayment penalties in 2026, especially for taxpayers with wages, retirement income, or multiple income sources.
For many taxpayers, increasing withholding is one of the cleanest fixes.
Why? Because withholding is often easier to manage than quarterly estimates, especially for people with W-2 wages, pensions, or retirement distributions. A strategic adjustment can help close the gap before the year ends.
This is particularly helpful if you:
- have a job or your spouse has a job
- receive pension income
- take IRA distributions
- receive Social Security and can manage tax withholding elsewhere
- want a more automatic system
The earlier this is adjusted, the easier it is to spread the tax burden over the rest of the year.
3. Set up quarterly estimated tax payments
If you are self-employed, own a pass-through business, receive large 1099 income, or have significant untaxed income, quarterly estimates may be necessary.
The mistake many people make is waiting until year-end to guess a number. That usually leads to underpaying, overpaying, or missing deadlines entirely.
A better approach is to calculate estimated payments based on projected income and then revisit them as the year changes.
This matters for:
- sole proprietors
- partners
- S Corporation owners
- real estate investors
- consultants and contractors
- taxpayers with large investment income outside payroll withholding
Quarterly Estimated Tax Deadlines
If you rely on quarterly estimated tax payments, the IRS generally expects payments on the following schedule:
• April 15
• June 15
• September 15
• January 15 of the following year
Missing or underpaying one of these installments is one of the most common triggers for IRS underpayment penalties.
Business owners and investors should review income before each deadline to confirm their estimated payments remain accurate.
4. Build a tax reserve into your cash flow
A lot of underpayment problems start as a cash flow problem, not a tax problem.
If every dollar that comes in gets spent, there is nothing left for quarterly payments. Then the tax bill arrives with penalties attached.
A better system is to move a percentage of income into a separate tax savings account each time money comes in. That way, estimated payments are funded before the cash disappears into operations or lifestyle spending.
For business owners, this one habit alone can prevent a lot of pain.
5. Revisit your plan after major income changes
Even a good tax plan can go stale fast.
You should revisit projections when any of the following happens:
- business profit rises sharply
- you add a new income stream
- you sell property or investments
- you take a retirement distribution
- you do a Roth conversion
- your spouse changes jobs
- payroll changes
- distributions increase
- deductions are lower than expected
The worst time to discover a tax problem is after the year is over.
6. Do not guess based on “what you paid last year”
Last year’s tax payments may not protect you if your situation has changed significantly.
That is especially true for business owners whose income moves around from year to year. A safe number for one year can become a dangerous underpayment in the next.
Using old numbers without current projections is one of the most common reasons taxpayers get surprised.
7. Work from a projection, not a reaction
The best way to avoid penalties is to project before the year closes.
That means reviewing:
- expected business income
- payroll and withholding
- retirement income
- investment gains
- deductions
- filing status
- major tax elections or strategy moves
When tax planning is proactive, you can make smaller adjustments earlier instead of larger, painful catch-up payments later.
Why Business Owners Must Avoid IRS Underpayment Penalties in 2026
Business owners are especially vulnerable to underpayment penalties because income is often less predictable and less tax is withheld automatically.
For many S Corporation owners, reviewing compensation and estimated tax payments is a key step to avoid IRS underpayment penalties in 2026.
This is even more common when the owner:
- takes draws instead of wages
- does not review profit quarterly
- waits until tax season to look at the numbers
- uses the bank account balance to judge affordability
- does not separate tax reserves from operating cash
- has multiple entities or income streams
If you own an S Corporation, this issue can become even more serious when wages are too low and distributions are high. You may end up with both a tax planning problem and a compliance problem.
That is why underpayment planning should be part of broader year-round tax strategy, not just a quarterly payment guess.
Common Ways to Avoid IRS Underpayment Penalties
| Strategy | Best For | Benefit |
|---|---|---|
| Increase withholding | W-2 employees | Automatic tax payments |
| Quarterly estimated payments | Self-employed taxpayers | Matches tax to income |
| Safe harbor payments | Variable income | Avoids penalties |
| Tax projections | Business owners | Prevents year-end surprises |
Real Estate Investors Can Get Caught Too
Real estate investors often assume depreciation will protect them from tax surprises. Sometimes it does. Sometimes it does not.
Underpayment issues can show up when there is:
- taxable rental income
- gain from a sale
- depreciation recapture
- short-term rental income
- passive loss limitation issues
- interest and dividend income layered on top of real estate income
This is one reason investors benefit from projecting tax before the year ends instead of waiting until returns are prepared.
What to Do Now to Avoid IRS Underpayment Penalties in 2026
If you owe this year, here is the practical next move:
Step 1: Find out why
Do not stop at the balance due. Diagnose the cause.
Step 2: Estimate whether the same pattern will continue in 2026
If income, withholding, and cash flow look similar, the same problem may repeat.
Step 3: Fix the payment method
That may mean:
- increasing withholding
- adding or revising estimated payments
- changing owner compensation strategy
- creating a separate tax reserve
- updating bookkeeping and profit reviews
Step 4: Review before year-end
Do not assume the first fix is enough. Review again before the year closes.
The Bigger Problem Is Not the Penalty
The penalty itself matters, but it is rarely the biggest problem.
Usually, the bigger issue is that owing a large tax bill means:
- cash flow was not planned well
- the business may not be reserving for taxes correctly
- compensation strategy may be off
- estimated payments are reactive instead of intentional
- no one is projecting the outcome before year-end
That is exactly why proactive tax planning matters.
A tax return tells you what happened.
Tax planning gives you a chance to change what happens next.
CPA Insight
Many taxpayers think the problem is, “I owed too much.”
Usually, the deeper problem is this: no one was monitoring how the tax bill was building during the year.
That is why simply preparing the return is not enough for many business owners. If your income is variable, multi-state, entity-based, or growing, you need a payment strategy that moves with the numbers.
Frequently Asked Questions
Yes. Business income often does not have automatic withholding, which means owners have to be more intentional about estimates, reserves, and year-round review.
Sometimes, yes. For taxpayers with wages, pensions, or distributions that allow withholding, it can be simpler and more consistent. For self-employed taxpayers and many business owners, quarterly estimates are still often necessary.
Yes. In many cases, action taken during the year can improve the outcome. The sooner the issue is identified, the more options you usually have.
Not always. Owing a balance does not automatically mean a penalty applies. But it can be a warning sign that too little tax was paid during the year.
The best approach is to review why you owed this year, project next year’s tax liability, and adjust withholding or estimated payments before the problem repeats.
Why This Matters for South Jordan Business Owners
For many business owners in South Jordan, Utah and throughout the Salt Lake Valley, tax surprises do not come from one bad month. They come from a full year of strong revenue, owner draws, uneven bookkeeping, and no proactive payment plan.
That is why year-round planning matters more than “filing on time.”
At Madsen and Company, we work with business owners, S Corporation owners, and real estate investors who want clearer direction before tax problems become expensive.
Related Tax Planning Resources
You may also find these guides helpful:
- S Corporation Tax Planning Strategies
- Reasonable Salary for S Corporation Owners
- Why March Is Too Late for Tax Planning
- What a Planning-First CPA Actually Does
Stop Repeating the Same Tax Surprise
Owing taxes this year does not mean you have to walk into the same problem in 2026.
If you are a business owner, S Corporation owner, or real estate investor and want a clearer plan for withholding, estimated payments, and proactive tax strategy, Madsen and Company can help you review what happened and build a smarter approach for next year.
Ready for a better tax plan?
The goal is simple: create a plan that helps you avoid IRS underpayment penalties in 2026 and removes tax surprises before they happen.
Schedule a consultation with Madsen and Company to review your current tax situation, identify why you owed, and create a proactive strategy designed to reduce surprises and help you avoid underpayment problems going forward.