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michelin associates presents tax answers in 90 seconds how can i avoid the penalty for underpayment of my taxes good question the u.s income tax system is a pay-as-you-go tax system which means that you must pay income taxes as you earn or receive your income during the year if you donamp;#39;t do this then you may be assessed a penalty for underpayment of your taxes there are two ways that you can pay as you go one is through tax withholding from your employer the other is by making estimated tax payments generally most taxpayers make estimated tax payments in every quarter to avoid the penalty to avoid the underpayment penalty your withholding plus estimates must be equal to one of the following 100 of the prior yearamp;#39;s tax or 90 of the current yearamp;#39;s tax or 90 of the annualized current yearamp;#39;s tax now the penalty formula for underpayment is the current federal short-term rate plus three percent times your underpayment amount lastly the penalty is not imposed i
