Form 2210: The Underpayment Penalty and How to Avoid It
How the penalty is computed quarter by quarter, when the form is required, and the annualized method that fits seasonal income
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
Form 2210 is the form individuals use to determine whether they owe a penalty for underpaying estimated tax and how much. The penalty is interest — the federal underpayment rate applied to each quarter's shortfall until it was paid. Most taxpayers need not file it; the IRS computes the penalty. Schedule AI, for uneven income, is the exception worth filing.
On this page
When is the penalty owed?
When the tax paid through withholding and estimated payments by each quarterly due date falls short of the required installment — one-quarter of the safe harbor amount (90 percent of this year's tax, or 100 or 110 percent of last year's — the safe harbor guide) — and the tax on the return minus withholding (estimated payments are not counted) is US$1,000 or more. Because it is computed per quarter, a taxpayer who underpays in April and overpays in September owes the penalty on the April shortfall for the months it stood; the later payment stops it accruing but does not erase it.
How is the penalty computed?
| Step | What happens |
|---|---|
| Required annual payment | The lesser of 90 percent of this year's tax or 100 / 110 percent of last year's (Part I) |
| Required installment | One-quarter of the required annual payment for each due date — or the annualized amount under Schedule AI |
| Payments credited | Withholding (spread evenly across the four periods unless you elect actual dates) plus estimated payments credited to the period paid |
| Underpayment per period | Required installment minus payments; an overpayment in one period carries to the next |
| Penalty | Each period's underpayment × the federal underpayment rate (the short-term rate plus 3 percentage points, set quarterly — 7 percent for the third and fourth quarters of 2026) × the fraction of the year from the due date to the earlier of the payment date or April 15 |
The rate has run between 6 and 8 percent since 2023 — 8 percent through 2024, 7 percent in 2025, 6 to 7 percent in 2026; at 7 percent, a US$5,000 shortfall left unpaid from April 15 to the following April 15 costs about US$350. It is not a flat percentage of the tax and it is not deductible.
Do I have to file Form 2210?
Usually not. If you owe a penalty and do nothing, the IRS computes it and sends a bill — often the simpler path. You must (or should) file it when: you are requesting a waiver (Part II, box A or B); you are using the annualized income installment method (box C — Schedule AI must be attached); you want withholding credited on the dates actually withheld rather than spread evenly (box D); or you are filing a joint return this year but filed separately last year (or the reverse) and the prior-year tax must be recomputed (box E). Checking a box in Part II is what tells the IRS not to compute the penalty its default way.
What is Schedule AI — the annualized method?
For taxpayers whose income was uneven across the year, Schedule AI recomputes the required installments to match when the income was actually earned: it annualizes the income through March 31, May 31, August 31, and December 31, computes the tax on each annualized figure, and requires 22.5, 45, 67.5, and 90 percent of it cumulatively. A business that earns 60 percent of its income in the fourth quarter has small required installments in April and June and a large one in January — and no penalty for having paid little early in the year. It requires books current enough to state income through each cutoff date, and it is filed with the return (a taxpayer cannot use the annualized method for one quarter and equal installments for the rest — the schedule covers all four). The seasonal trade guides on this site — chimney sweeps, landscapers, coaches with launches — are the businesses it exists for.
What waivers exist?
The IRS will waive the penalty (Part II box A) for underpayments caused by a casualty, disaster, or other unusual circumstance where imposing it would be inequitable, and for taxpayers who retired after age 62 or became disabled during the year or the prior year and had reasonable cause. Box A requests a waiver of the entire penalty (page 1 only, no computation); box B requests a waiver of part of it, with the penalty and the waived amount computed. First-time abatement does not apply to the estimated tax penalty — the IRS's administrative waiver covers failure-to-file, failure-to-pay, and failure-to-deposit penalties only. A written explanation attaches to the form.
Worked example
A landscaping contractor's required annual payment is US$36,000 (100 percent of last year's tax; prior AGI under US$150,000). Equal installments: US$9,000 each. His season runs March to November, so his income through March 31 is nearly zero and through May 31 about 20 percent of the year's. Under equal installments he paid US$2,000 in April, US$6,000 in June, US$14,000 in September, US$14,000 in January — total US$36,000, but was short US$7,000 from April 15, US$10,000 cumulatively from June 15, and still US$5,000 from September 15 until January. Penalty without Schedule AI: roughly US$360 at the 2026 rates. With Schedule AI: annualized income through March 31 is US$8,000 (tax on it, times 22.5 percent, is a few hundred dollars — his US$2,000 covers it); through May 31 the annualized figure requires about US$6,500 cumulatively — his US$8,000 covers it; through August 31 the annualized requirement stays within his US$22,000 paid, and the January installment matches his actual heavy season. Penalty: zero. He checks box C, attaches Schedule AI, and files the form with his return.
Frequently asked questions
What is Form 2210?
The form individuals use to figure the estimated tax underpayment penalty, request a waiver, or apply the annualized income installment method. The IRS computes the penalty for taxpayers who don't file it.
Do I have to file Form 2210?
Only if you are requesting a waiver, using the annualized method, electing actual withholding dates, or recomputing the prior-year tax after a change in filing status. Otherwise the IRS bills the penalty.
How is the underpayment penalty calculated?
For each quarterly period, the shortfall between the required installment and the amount paid is charged the federal underpayment interest rate from the due date until the shortfall is paid or April 15 of the following year.
What is Schedule AI?
The annualized income installment method — it recomputes each required installment from the income actually earned through that quarter's cutoff, so seasonal and lumpy incomes are not penalized for paying less in slow quarters.
Official sources
The IRS states: “Use Form 2210 to see if you owe a penalty for underpaying your estimated tax and, if you do, to figure the amount of the penalty.” — Internal Revenue Service, About Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, https://www.irs.gov/forms-pubs/about-form-2210
The IRS states: “If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.” — Internal Revenue Service, Estimated taxes, https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk handles Form 2210 and Schedule AI preparation for seasonal businesses, penalty computation and waiver requests, and withholding-date elections. See pricing or book a call.
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