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If you don't pay enough of your income tax throughout the year, you may be subject to penalties for underpayment of estimated tax. This can happen if you don't have enough taxes withheld from your wages or if you don't pay enough estimated tax if you are self-employed or have other income not subject to withholding.

Here's a breakdown of the penalties involved:

1. Underpayment Penalty:

* This penalty applies if you owe at least $1,000 in tax after subtracting your withholding and refundable credits.

* The penalty is calculated based on the amount you underpaid, the period when the underpayment occurred, and the IRS interest rate for underpayments, which changes quarterly.

* For the period of April through June 2025, the annual interest rate for underpayment penalties is 7% for individuals.

* The penalty is calculated separately for each quarter. You might owe a penalty for one quarter even if you overpaid in another.

* How to potentially avoid this penalty:

* Pay at least 90% of the tax you owe for the current year.

* Pay 100% of the tax you owed for the prior year (110% if your adjusted gross income was over $150,000, or $75,000 if married filing separately).

* Owe less than $1,000 in tax after subtracting withholdings and credits.

2. Failure-to-Pay Penalty:

* This penalty applies if you file your tax return on time but don't pay the full amount of tax owed by the due date.

* The penalty is 0.5% of the unpaid taxes for each month or part of a month that the tax remains unpaid, up to a maximum of 25% of your unpaid taxes.

* The penalty rate increases to 1% per month if the tax remains unpaid 10 days after the IRS issues a notice of intent to levy.

* If you have an approved IRS installment agreement, the penalty rate is reduced to 0.25% for each month the agreement is in effect.

3. Interest:

* Interest can be charged on underpayments and unpaid balances, as well as on penalties themselves, from the due date of the return until the date of payment.

* The interest rate is determined quarterly and is the federal short-term rate plus 3 percentage points. It compounds daily.

In summary, if you don't pay enough tax throughout the year, you could face both an underpayment penalty and a failure-to-pay penalty, along with accruing interest on the unpaid amounts and penalties.

It's generally best to pay your estimated taxes on time or ensure you have enough withholding to cover your tax liability throughout the year to avoid these penalties and interest.