How should taxpayers adjust withholding in 2025 to avoid underpayment penalties?
Executive summary
To avoid 2025 underpayment penalties taxpayers should either have withholding/estimated payments equal at least 90% of 2025 tax liability or meet a safe‑harbor based on prior year payments (generally 100% of 2024 tax, or 110% if 2024 AGI exceeded $150,000) [1] [2]. The IRS tells workers to use the Tax Withholding Estimator and, if needed, submit a new 2025 Form W‑4 so employers can adjust paycheck withholding for 2025 law changes and new deductions [3] [4].
1. Know the numerical guardrails: how much to pay during the year
The basic numeric rules are straightforward: most taxpayers avoid the underpayment penalty by paying at least 90% of the current year’s tax or by paying at least 100% of the prior year’s tax in advance (the 100% becomes 110% for higher‑income taxpayers — those with AGI above $150,000) [1] [2]. IRS guidance also notes a de minimis exception: if you owe less than $1,000 after subtracting withholding and refundable credits, the penalty generally won’t apply [1].
2. Withholding is often the simplest fix — and the IRS urges action now
The IRS explicitly recommends checking withholding early and adjusting it if necessary because withholding is treated as paid evenly through the year and can prevent underpayment penalties without filing estimated payments; the agency points taxpayers to the Tax Withholding Estimator and to submitting an updated 2025 Form W‑4 to employers when changes are needed [3] [5]. Publication 505 and Publication 15‑T describe worksheets and the mechanics for projecting withholding and computing per‑paycheck adjustments [6] [7].
3. 2025 tax‑law and table changes affect withholding calculations
New rules and deductions from the 2025 legislative package mean taxpayers who expect to claim certain new deductions must file a new 2025 Form W‑4 or use the worksheet to lower withholding appropriately; the IRS warns the Tax Withholding Estimator may not yet reflect all 2025 law changes, so manual calculation or professional help may be required [4]. The IRS also updated withholding tables for 2025 to reflect inflation adjustments, which change how employers compute federal withholding from wages [8] [9].
4. Safe‑harbor and timing strategies, plus Form 2210 options
Taxpayers worried about uneven income can rely on safe‑harbor payments (100%/110% prior year or 90% current year) or use the annualized installment method on Form 2210 to match payments to when income was actually received and potentially reduce penalties [1] [10]. The IRS publishes Topic 306 and Form 2210 guidance describing these options and exceptions, including relief for qualifying farmers/fishers and reasonable‑cause waivers [11] [1].
5. Practical steps to adjust withholding and avoid surprises
The IRS recommends: run the Tax Withholding Estimator; if you need to increase withholding give your employer an updated 2025 W‑4; use Publication 505 Worksheet 1‑5 to estimate how much to change per pay period; or, if self‑employed or with other nonwage income, make timely quarterly estimated payments [5] [6] [3]. Payroll and tax‑preparer guidance reiterates that increasing employer withholding is a common and effective alternative to quarterly estimated payments [12].
6. Competing perspectives and real‑world tradeoffs
Tax preparers and consumer guides underscore the same math but emphasize tradeoffs: withholding increases reduce take‑home pay immediately but avoid the administrative burden of quarterly payments and the penalty risk; estimated payments preserve cashflow timing but require accurate forecasting to avoid penalty risk [12] [13]. Several advisory sources note that interest/penalty rates have been elevated in 2025, increasing the cost of underpayment and making conservative withholding adjustments more attractive for many taxpayers [13] [14].
7. Limitations in current public tools and reporting to watch
The IRS cautions that its online Tax Withholding Estimator may not yet incorporate all 2025 law changes (notably new deductions under recent legislation), so taxpayers relying solely on the estimator could miscalculate withholding needs; the agency suggests manually using the 2025 W‑4 worksheet or consulting a professional if you expect to claim those new items [4]. Available reporting does not discuss every niche scenario (for example, precise treatment of particular newly phased‑in deductions), so taxpayers with complex returns should consult Publication 505, Publication 15‑T, or a tax advisor [6] [7].
Sources cited: IRS and major tax guidance described above [3] [4] [6] [7] [5] [8] [9] [1] [2] [12] [11] [10] [13] [14].