Author credentials
With more than 15 years working as a CPA advising individuals, self-employed professionals, and small business owners, I regularly review estimated tax strategies to prevent underpayment penalties. The guidance below reflects common pitfalls I see in practice and practical fixes to reduce risk.
Why this matters
If you don’t pay enough tax during the year, the IRS can charge an underpayment penalty and interest on the unpaid amount. For many taxpayers — freelancers, contractors, investors, and small-business owners — avoiding that penalty is more about timing payments than reducing tax owed. The IRS provides “safe-harbor” rules so taxpayers who meet certain thresholds won’t face penalties even if their final tax bill is higher than expected (see IRS Publication 505 and the Estimated Taxes page) (IRS, Publication 505; IRS, Estimated Taxes).
How the safe-harbor tests work (plain language)
The IRS generally looks at how much you paid during the year through two main measures:
- Pay at least 90% of your current year’s tax liability through withholding and estimated payments, or
- Pay 100% of the prior year’s tax liability through withholding and estimated payments (110% if your adjusted gross income was over $150,000, or $75,000 if married filing separately).
If you meet either test, you typically avoid the underpayment penalty even if you end up owing more when you file. These rules and thresholds are explained in IRS Publication 505 and on the IRS Estimated Taxes pages (IRS Publication 505; IRS, Estimated Taxes).
Who is affected
- Self-employed workers, freelancers, independent contractors
- Small business owners and partners
- Investors and renters with minimal withholding
- Taxpayers receiving large one-time payments (bonuses, stock sales)
The IRS generally expects estimated payments if you expect to owe $1,000 or more when you file after subtracting withholding and refundable credits (IRS Publication 505).
Practical examples and quick calculations
Example 1 — Using the prior-year safe harbor
- Prior-year tax liability: $20,000
- Current-year AGI under $150,000
- Safe-harbor amount required: 100% × $20,000 = $20,000
If you pay $20,000 during the current year via withholding and estimated payments, you’ll avoid the penalty even if your current-year taxable income increases.
Example 2 — High-income taxpayer
- Prior-year tax liability: $20,000
- Current-year AGI over $150,000
- Safe-harbor amount required: 110% × $20,000 = $22,000
A higher AGI increases the prior-year safe-harbor threshold.
Example 3 — Pay 90% of current-year tax
- Estimated total tax for current year: $50,000
- 90% safe-harbor = $45,000
If you pay at least $45,000 during the year, you avoid the penalty under the current-year test.
Quarterly due dates and timing
Estimated tax payments are generally due four times a year (approximately April, June, September, and January of the following year). If your income is uneven, you can use the annualized installment method on IRS Form 2210 to match payments to when you actually received the income and potentially eliminate or reduce a penalty (IRS Form 2210; IRS Publication 505).
Annualization can be especially helpful for seasonal businesses or those with a big sale late in the year. See my guide to forecasting irregular income for more detail.
Common ways people still get a penalty
- Relying on last year’s income while your income doubled (or fell dramatically) and not adjusting payments
- Paying too late in the year — safe harbor means you must have paid enough during the payment periods, not just before you file
- Misunderstanding the AGI test and failing to apply the 110% rule when required
Strategies I use with clients (practical, actionable)
- Use withholding where possible
- Increasing withholding on a W-2 or retirement distribution is treated as paid evenly across the year, which often protects against underpayment more reliably than quarterly estimates.
- Check safe-harbor early and re-run calculations midyear
- Recalculate after big income events (stock sales, contract close, bonus). If you’re trending short, either increase the next estimated payment or adjust withholding.
- Consider annualizing income on Form 2210
- If your income is lumpy, the annualized installment method can show you paid enough when you got the income and reduce penalties.
- Use EFTPS or IRS Direct Pay for timely submissions
- Use electronic payment systems (EFTPS or IRS Direct Pay) to ensure payments are credited on time. Keep confirmation numbers and bank records.
- Keep a running projected tax worksheet
- Track taxable income, expected deductions, and credits, and translate that into a projected tax liability. Recalculate each quarter.
- Use payroll withholding for supplemental income
- If you receive freelance income but also have a W-2 job, increase W-2 withholding to cover underpayment risk. Withholding is applied evenly across the year.
Table: Safe-harbor summary
| Safe-harbor method | What you must pay | When it avoids a penalty |
|---|---|---|
| 90% of current year | 90% of tax shown on current-year return | If paid through withholding/estimated payments by due dates |
| 100% of prior year | 100% of prior year tax (110% if AGI > $150,000) | Protects even if current-year tax rises |
| Farmers/fishermen special rule | 2/3 of prior-year tax (special deadlines apply) | Available to qualifying farmers and fishermen (see IRS guidance) |
Tools, forms, and resources
- IRS Publication 505, Tax Withholding and Estimated Tax (for rules and examples): https://www.irs.gov/pub/irs-pdf/p505.pdf
- IRS Estimated Taxes page: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
- Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts): https://www.irs.gov/forms-pubs/about-form-2210
Common mistakes and misconceptions
- “I can wait until the end of the year and pay it then.” — No. Penalties apply if you underpay during the year, not only at filing.
- “Safe harbor uses last year automatically.” — You must meet the conditions (100% or 110% of last year’s tax) and timing, and it may not protect you if your prior-year tax was unusually low.
- “Withholding isn’t useful for freelancers.” — Increasing withholding on a W-2 or pension counts as paid evenly over the year and can be the simplest protection.
When you might qualify for a waiver
The IRS may waive the penalty if you had reasonable cause for underpaying (serious illness, casualty, or other unforeseen events) or if you retired or became disabled during the year and meet additional criteria. You request an abatement using the instructions on Form 2210 or in response to a CP14/CP144 notice. See IRS guidance for specifics (IRS, Publication 505).
Interlinks to related FinHelp guides
- For safe-harbor nuances with uneven income, see “Quarterly Estimated Taxes: How to Forecast When Income Is Irregular” (FinHelp): https://finhelp.io/glossary/quarterly-estimated-taxes-how-to-forecast-when-income-is-irregular/
- For practical safe-harbor scenarios, read “Estimated Tax Safe Harbor” (FinHelp): https://finhelp.io/glossary/estimated-tax-safe-harbor/
- If you’re a gig or seasonal worker, this guide helps: “Managing Estimated Taxes for Seasonal and Gig Income” (FinHelp): https://finhelp.io/glossary/managing-estimated-taxes-for-seasonal-and-gig-income/
Frequently asked questions
Q: How much do I owe before I must make estimated payments?
A: If you expect to owe $1,000 or more when you file after subtracting withholding and refundable credits, you generally should make estimated payments (IRS Publication 505).
Q: Can I avoid penalties by increasing withholding late in the year?
A: Yes — additional withholding is treated as if paid evenly across the year and can eliminate penalties in many cases.
Q: What form calculates the underpayment penalty?
A: Form 2210 calculates the penalty and allows you to use the annualized installment method. You can attach it to your return or respond if the IRS sends a notice (Form 2210).
Professional disclaimer
This article is educational and based on current IRS guidance as of 2025. It does not replace personalized tax advice. Consult a licensed CPA or tax professional for guidance specific to your situation.
Authoritative sources
- IRS, “Estimated Taxes”: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
- IRS Publication 505, “Tax Withholding and Estimated Tax”: https://www.irs.gov/pub/irs-pdf/p505.pdf
- IRS Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts”: https://www.irs.gov/forms-pubs/about-form-2210
