Maryland Underpayment Penalty: Rates, Safe Harbors, and Waivers

Maryland’s underpayment penalty is actually an interest charge on estimated tax you should have paid quarterly but didn’t. For 2025, the Comptroller set the rate at 11.4825% per year, and it accrues on each missed or short installment from its due date until you pay.¹ You avoid the charge entirely by meeting one of two safe harbors, and you may qualify for a waiver if the shortfall was outside your control.

Who Owes the Charge

The rule applies to income that isn’t already having Maryland tax withheld. Self-employment earnings, freelance work, rental income, investment gains, retirement distributions without withholding — anything in that category counts. If your non-withheld income is expected to generate more than $500 in combined Maryland state and local income tax after credits, you’re required to make quarterly estimated payments using Form 502D.²

The $500 threshold is combined, not state-only. County income tax rates run from 2.25% to 3.30%, so a taxpayer who expects to owe only $400 in state tax can still trip the requirement once county tax is added in.³⁴ The people who most often get caught are those with a sudden jump in non-wage income — a rental sale, a large bonus without withholding, an investment cash-out — or someone leaving a W-2 job for contract work and not realizing withholding no longer covers them.

How the Interest Is Calculated

Maryland treats the shortfall as an interest charge rather than a flat penalty. Under Tax-General Section 13-604, the Comptroller sets the annual rate each October for the following calendar year. It equals the greater of a 9% statutory floor (applicable 2023 forward) or three percentage points above the average prime rate during the state’s prior fiscal year.⁵ That formula produced 11.4825% for 2025.¹ The 2026 rate will be published on the Comptroller’s website later in 2025.

Interest runs quarter by quarter. If you underpay in the first quarter but overpay in the third, the later overpayment doesn’t retroactively erase interest that accrued on the earlier shortfall. Each installment is measured from its own due date until you actually pay it. Form 502UP publishes quarterly interest factors that you multiply against each period’s shortfall to get the total owed.⁴

Timing matters as much as total amount. Paying $4,000 in January for the whole year still leaves you short in April, June, and September if the required quarterly payment exceeds what you allocated. Spreading evenly across the four deadlines almost always produces less interest than lumping payments together.

Safe Harbors That Eliminate the Penalty

Maryland gives you two benchmarks. Meet either one — through withholding, estimated payments, or a combination — and no interest applies:

Pay at least 90% of your current-year total state and local tax.
Pay at least 110% of last year’s total Maryland tax liability.

The unpaid tax for penalty purposes is the lesser of these two shortfalls, so hitting either target zeroes out the charge.² The 110% prior-year rule is the easier one when your income fluctuates: you already know last year’s tax bill, so multiply it by 1.1, divide by four, and pay that each quarter regardless of what happens this year.

One trap for people who follow federal rules: Maryland’s prior-year safe harbor is 110% for everyone. The federal version drops to 100% for taxpayers with adjusted gross income of $150,000 or less. Maryland does not offer that reduced threshold — it’s 110% across the board.⁴

Uneven Income: The Annualized Method

If your income arrives unevenly during the year, equal quarterly payments can force you to overpay early. Maryland allows an annualized income installment method on Form 502UP that recalculates each quarter’s required payment based on income you’ve actually earned to that point. It helps commission-based workers, seasonal businesses, and anyone whose income concentrates in certain months.

Farmers and Fishermen

If at least two-thirds of your gross income comes from farming or fishing, you can skip quarterly deadlines entirely. File your complete annual return by March 1 and pay the full tax then, with no underpayment interest.⁴

Other Automatic Exemptions

A few additional situations block the charge without needing to argue the point:

An underpayment of less than $500 draws no interest.²
If at least 90% of your taxable income is taxed by another state and the underpayment is limited to the county income tax only, no interest applies.²

Requesting a Waiver for Reasonable Cause

Tax-General Section 13-604 gives the Comptroller discretion to waive interest for reasonable cause.⁵ The statute doesn’t list qualifying circumstances, so requests are evaluated case by case. Situations that commonly support a waiver include serious illness or hospitalization, a natural disaster, or the death of an immediate family member.

If you request one, be specific. Attach medical records, insurance claims, deployment orders, or whatever documentation supports the timeline. A general statement that you “forgot” or “didn’t know” rarely persuades the Comptroller’s office.

Maryland recently added an automatic waiver for one group. Under 2025 legislation, the Comptroller must waive interest on unpaid income tax for taxpayers who were incarcerated during the tax year in which the liability arose, provided they apply for and are placed on an installment plan through the state’s Income Tax Reconciliation Program.⁶

Quarterly Due Dates

Estimated payments track the federal quarterly schedule:

April 15, covering income earned January through March.
June 15, covering April and May.
September 15, covering June through August.
January 15 of the following year, covering September through December.

If a due date falls on a weekend or holiday, it shifts to the next business day.² Missing even one installment starts interest running on that quarter’s shortfall, even if you catch up later.

You can pay through the Comptroller’s iFile system at marylandtaxes.gov around the clock, or mail a paper Form 502D with a check.⁷ Electronic payment is faster and creates an automatic record if you ever need to prove a payment was timely.

The Simplest Ways to Avoid It Next Year

For most taxpayers, the 110% prior-year safe harbor is the easy button. Pull last year’s Maryland return, find your total state and local tax, multiply by 1.1, divide by four, and pay that each quarter. You’re covered even if this year’s income doubles. The downside is potentially overpaying, but any excess comes back as a refund.

If you’d rather not tie up the cash, estimate your current-year income each quarter and target the 90% threshold instead. That takes more effort and carries risk if you underestimate. The annualized income method on Form 502UP is the structured way to do it when income is uneven.

For W-2 employees with side income, the easiest fix is often bumping your day-job withholding rather than making separate estimated payments. Submit a new MW507 to your employer claiming fewer exemptions or requesting additional withholding per paycheck. Maryland doesn’t distinguish between money that arrives through withholding and money that arrives through estimated payments — both count toward the same threshold.² Withholding also carries a built-in advantage: Maryland generally treats it as paid evenly across the year regardless of when it was actually withheld, so a December withholding increase can retroactively cover earlier quarters.

One boundary worth flagging. Underpayment interest is a separate issue from what happens if you leave the underlying tax debt unpaid after your return is filed. Ignored balances get referred to the state’s Central Collection Unit and trigger a further collection fee, wage liens, bank levies, refund interception, and holds on driver’s license and vehicle registration renewals. Those consequences sit on top of the underpayment interest, not in place of it, and are worth addressing separately if a balance is already past due.

1
Maryland Comptroller. Maryland Tax Alert – Sales and Use Tax Updates 2025-2026
2
Cornell Law School. Maryland Code Regs 03.04.01.02 – Estimated Tax Return
3
Maryland Comptroller. Maryland Withholding Tax Facts January 2025
4
Maryland Comptroller. Form 502UP Underpayment of Estimated Income Tax by Individuals
5
Maryland General Assembly. Maryland Tax-General Section 13-604
6
Maryland General Assembly. Chapter 735 – Senate Bill 295 – Income Tax Reconciliation Program
7
Maryland Comptroller. Income Tax Alert – Personal Declaration of Estimated Income Tax