The April Surprise: What Happens if I Don’t Withhold Enough Taxes?

Written by Evan wolf | Feb 17, 2026 9:00:27 PM

For most Americans, tax season is a time to wait for a refund check. But for a growing number of taxpayers, especially gig workers, dual-income households, and those with investment income, April brings a different kind of surprise: a massive tax bill and underpayment penalties.

If you didn't have enough tax withheld from your paycheck in 2025, or if you missed your quarterly estimated payments for 2026, here is what you need to know about the consequences and how to fix them.

1. The Underpayment Penalty

The IRS operates on a "pay-as-you-go" system. They expect their cut of your income as you earn it, not just once a year in April. If you owe more than $1,000 at the time of filing, the IRS may assess an Underpayment of Estimated Tax Penalty.

The penalty is calculated based on:

  • The amount of the underpayment.
  • The period when the underpayment was due.
  • The current interest rate.

2. Compounding Interest (The 2026 Rate)

As of early 2026, the IRS interest rate for underpayments is 7% per year, compounded daily. This rate is significantly higher than the 3% rates seen just a few years ago. Every day you wait to pay the balance, the 7% interest accrues, potentially turning a manageable debt into a long-term financial burden.

3. The "Safe Harbor" Rules: How to Avoid the Penalty

The good news is that the IRS provides a "Safe Harbor" to protect you from the underpayment penalty, even if you owe a balance. You generally will not be penalized if your total withholding and timely estimated payments are at least:

  • 90% of the tax shown on your current year's return, OR
  • 100% of the tax shown on your prior year's return (110% if your Adjusted Gross Income was over $150,000).

Expert Tip: Safe Harbor only protects you from the penalty. You still have to pay the actual tax you owe. If you paid 100% of last year's tax but doubled your income this year, you’ll still owe a large check in April—just without the extra penalty.

4. Why Does Underwithholding Happen?

Underwithholding is rarely intentional. In our experience at Wolf Tax, it usually stems from:

  • The "Two-Earner" Trap: When both spouses work, their combined income may push them into a higher tax bracket than their individual employers realize.
  • Side Hustles & Gig Work: Income from Uber, Airbnb, or freelance projects rarely has taxes withheld, requiring you to make manual estimated payments.
  • Bonus & Stock Vesting: Large bonuses or RSU (Restricted Stock Unit) vestings are often withheld at a flat 22% rate, which may be far too low if you are in the 32% or 35% tax bracket.

5. How to Fix It for 2026

If you realized you under-withheld for the previous year, don't let it happen again. You can adjust your 2026 tax strategy today:

  1. Update Your W-4: Submit a new Form W-4 to your employer. Use Step 4(c) to request an "extra amount" of withholding from every paycheck.
  2. Make an Estimated Payment: If you missed the April 15 or June 15 deadlines, make a payment now. The IRS calculates penalties by the quarter, so paying late is still better than paying later.
  3. Use the IRS Estimator: Use the official IRS Tax Withholding Estimator
    4. to see exactly where you stand for the current year.

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