Taxpayers who do not pay enough California tax during the year through withholding and estimated tax payments may be subject to an underpayment of estimated tax penalty. Form 5805 is used to determine whether a penalty applies, calculate the penalty in certain situations, request a waiver, or use the annualized income method.
In many cases, the California Franchise Tax Board (FTB) calculates the penalty automatically and bills the taxpayer separately after the return is filed.
Do I Need Form 5805?
Most taxpayers do not need to complete Form 5805. The California Franchise Tax Board generally calculates any underpayment penalty automatically and sends a bill if a penalty is due.
Consider completing Form 5805 to:
- Request a waiver of the penalty.
- Use the Annualized Income Method because your income was not earned evenly throughout the year.
- You had uneven California withholding and want the penalty calculated using the actual withholding amounts and dates.
- Request a waiver of all or part of the penalty.
- Calculate the penalty when required.
- Determine whether an underpayment penalty applies.
Program Entry
State > Edit California Return > Miscellaneous Forms > Underpayment of Estimated Tax (Form 5805)
Who May Owe an Underpayment Penalty?
You may be subject to an underpayment penalty if:
- You expected to owe at least $500 in California tax ($250 if Married/RDP Filing Separately), and
- You did not pay enough tax during the year through withholding and/or estimated tax payments.
Common situations that can result in an underpayment penalty include:
- Self-employment income
- Investment income
- Rental income
- Retirement distributions with insufficient withholding
- Large capital gains
- Other income not subject to withholding
How Can I Avoid an Underpayment Penalty?
Generally, you can avoid an underpayment penalty if enough tax was paid during the year through:
- California withholding
- Estimated tax payments
- A combination of withholding and estimated tax payments
Many taxpayers who owe tax when filing still do not owe an underpayment penalty because they meet California's payment requirements.
Safe Harbor Rules
Generally, an underpayment penalty can be avoided if your withholding and estimated tax payments equal at least:
- 90% of your current year California tax liability, or
- 100% of your prior year California tax liability, or
- 110% of your prior year California tax liability if your California AGI exceeds certain thresholds.
High-Income Taxpayer Rule
Taxpayers with California AGI of:
- $1,000,000 or more, or
- $500,000 or more if Married/RDP Filing Separately
must generally use their current year tax liability when determining whether an underpayment penalty applies.
Program Entries
Prior Year Tax Liability
Enter your Prior Year Tax Liability shown on 2024, Line 64
Enter the amount from the prior year California return as indicated by the program. This amount is used to determine whether one of California's safe harbor provisions applies and whether an underpayment penalty may be owed.
Penalty Payment Date
Enter the date the underestimation payment penalty was or will be paid if paid before the due date of the tax return.
Enter a payment date only if the penalty has already been paid or will be paid before the return due date.
Most taxpayers will leave this field blank because the California Franchise Tax Board generally calculates and bills the penalty after the return has been processed.
Information Regarding Your Withholdings
Was Your California Withholding Not Withheld in Equal Installments and are You Able to Show the Actual Amounts Withheld Per Period?
When Should I Answer Yes? Most taxpayers should answer No.
California generally treats withholding as having been paid evenly throughout the year regardless of when it was actually withheld. However, if withholding occurred unevenly during the year and you can document the actual withholding amounts by quarter, select Yes.
If you answer Yes, the program will ask you to enter:
- First Quarter Payment
- Second Quarter Payment
- Third Quarter Payment
- Fourth Quarter Payment
Enter the actual California withholding attributable to each payment period. Using actual withholding amounts may reduce an underpayment penalty when a significant portion of withholding occurred later in the year.
Request a Waiver of Penalty
Are You Requesting a Waiver of the Penalty?
California may waive all or part of an underpayment penalty if the underpayment resulted from circumstances beyond the taxpayer's control. Examples include:
- Casualty losses
- Natural disasters
- Serious illness
- Disability
- Other unusual circumstances where imposing the penalty would be inequitable
If You Answer Yes, the program will request:
- Amount of penalty requested to be waived
- Waiver Explanation Line 1
- Waiver Explanation Line 2
Enter the amount of the penalty you are requesting to have waived along with a brief explanation of the circumstances that caused the underpayment. Examples may include:
- Federally declared disaster
- Extended hospitalization
- Serious illness
- Disability
- Other unusual circumstances outside the taxpayer's control
Important: Requesting a waiver does not guarantee approval. The California Franchise Tax Board will review the request and determine whether a waiver is warranted.
Annualized Income Method
Do you want to use the annualized method?
What Is the Annualized Income Method?
The Annualized Income Method allows taxpayers whose income was earned unevenly throughout the year to calculate required estimated tax payments based on when the income was actually received.
This method may reduce or eliminate an underpayment penalty when income was concentrated in specific periods rather than earned evenly throughout the year.
Consider Using the Annualized Method If:
- You operate a seasonal business.
- Most income was earned later in the year.
- You received a large bonus or commission.
- You sold investments resulting in a large capital gain.
- Self-employment income fluctuated significantly.
- Retirement distributions occurred later in the year.
Most taxpayers should select No unless income was received unevenly throughout the year. If your wages, retirement income, or other income were received consistently throughout the year, the Annualized Income Method will generally provide little or no benefit
If you answer yes, the program displays four annualization periods:
- 4/15/YYYY Annualized Method Entry
- 6/15/YYYY Annualized Method Entry
- 9/15/YYYY Annualized Method Entry
- 1/15/YYYY Annualized Method Entry
Information Requested for Each Period:
- Adjusted Gross Income (AGI) - Enter your cumulative California adjusted gross income (AGI) through the applicable annualization period.
- Itemized Deductions - Enter deductible itemized expenses attributable to that annualization period.
- Medical and Casualty - Enter qualifying medical expenses and casualty losses applicable through that period.
- Special Credits - Enter California tax credits applicable through that annualization period.