DEFINITION of 'Underpayment Penalty'
A tax penalty enacted on an individual for not paying enough of his or her total estimated tax and withholding. If an individual has an underpayment of estimated tax, they may be required to pay a penalty (on Form 2210).
BREAKING DOWN 'Underpayment Penalty'
To avoid an underpayment penalty you must pay either 100% of last year's tax or 90 percent of this year's tax by combining estimated and withholding taxes.