Estimated Tax Safe Harbor
If you pay at least 100% of last year's tax through withholding and quarterly estimates, or 110% if last year's AGI was above $150,000, the IRS charges no underpayment penalty, no matter how much more you owe this year. In a big income year, that lets you keep the rest of the cash working until April 15.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed October 9, 2026
Who it fits
- Business owners whose profit swings from year to year
- Taxpayers expecting a large one-time gain from a sale or a bonus
- Owners who want predictable, fixed quarterly payments
- Anyone who was penalized for underpayment last year
Who it's not for
- Taxpayers whose income is falling sharply, where 90% of this year's tax may be a smaller target
- Anyone who will not set aside the April balance; the safe harbor avoids the penalty, not the tax
- Taxpayers who did not file a return for the prior year
How it works
The required annual payment is the smaller of 90% of this year's tax or 100% of last year's tax. If last year's AGI was above $150,000 ($75,000 married filing separately), the prior-year figure is 110%.
Payments are due in four installments: April 15, June 15, September 15, and January 15. Each must be a quarter of the required amount, or the penalty runs on the shortfall for that quarter.
Withholding from wages is treated as paid evenly through the year, regardless of when it was actually withheld. An S-corporation owner can increase withholding on a December paycheck to cover earlier quarters.
If income arrives late in the year, the annualized installment method lets you match payments to when the income was earned.
No penalty applies if the balance due after withholding is under $1,000.
Illustrative example
Illustrative: a married couple had $80,000 of federal tax last year on $400,000 of AGI. This year they sell a business interest and expect $200,000 of tax.
- Prior-year safe harbor: $80,000 × 110% = $88,000
- Quarterly payment: $88,000 ÷ 4 = $22,000
- Current-year alternative: $200,000 × 90% = $180,000
- Required amount is the smaller: $88,000
- Balance due April 15 with no penalty: $200,000 − $88,000 = $112,000
The couple holds $112,000 until April 15 with no underpayment penalty, instead of paying $92,000 more during the year to meet the 90% test.
The rules
| Rule | Citation |
|---|---|
| The required annual payment is the lesser of 90% of current-year tax or 100% of prior-year tax. | IRC §6654(d)(1)(B) |
| The prior-year figure is 110% if prior-year AGI exceeded $150,000. | IRC §6654(d)(1)(C) |
| Withholding is treated as paid evenly through the year unless you elect otherwise. | IRC §6654(g) |
| The annualized income installment method can lower early-quarter payments. | IRC §6654(d)(2) |
| No penalty applies if the tax due after withholding is under $1,000. | IRC §6654(e)(1) |
Watch-outs
- The safe harbor protects against the penalty, not the tax. Move the April balance to a separate account as the income comes in.
- Missing one quarter breaks the safe harbor for that quarter; a later catch-up payment does not erase the penalty already accrued.
- Last year's tax includes self-employment tax and other taxes on the return, not just income tax.
- Each state that taxes income has its own rules. Texas has no personal income tax, but income from other states may need its own estimates.
What we do
We compute your safe harbor at the start of the year, schedule the four payments, and recheck after any major transaction. When a sale is coming, we tell you how much to set aside for April so there is no shortfall.
Questions
What does the underpayment penalty cost?
It works like interest: the IRS rate, the federal short-term rate plus 3 points, charged on each quarter's shortfall for the time it was late.
Is 110% based on last year's AGI or this year's?
Last year's. If last year's AGI was above $150,000, the 110% test applies this year.
Can I just pay everything with the January payment?
Not without a penalty for the earlier quarters, unless the annualized method applies. Extra wage withholding is the exception, since it counts as paid evenly.