If you are self employed, the tax on that income is due as you earn it, not when you file. There is no employer withholding it for you, so you pay it yourself in instalments through the year. Miss that and the return itself can be perfectly correct and still arrive with a penalty attached.
The good news is that sizing the payments does not require predicting a year that has not happened yet. There is a route that uses a number you already know.
The four dates are not quarters
For a calendar year taxpayer, the payments for the 2026 tax year are due:
- 15 April 2026
- 15 June 2026
- 15 September 2026
- 15 January 2027
Look at the gaps. The first period is three months, the second is two, the third is three, and the last is four. They are called quarterly and they are not quarters. If a date falls on a weekend or a public holiday it rolls to the next business day.
The fourth payment falling in January of the following calendar year is the one that surprises people most. The tax year has ended and a payment for it is still outstanding.
Why the first profitable year is where this goes wrong
The common story is not carelessness. Somebody has worked for wages all their life, with tax deducted before the money arrived, and then has a first year of self employment income and a Schedule C to go with it. Nothing in that experience suggests tax is due before a return exists. They file in April, find the whole year’s tax payable at once, and find a penalty for underpayment on top of it.
The penalty is not for filing late and it is not for paying the return late. It is for not having paid through the year.
The safe harbour, and what it actually does
You can generally avoid the penalty if you fall into one of these:
- You owe less than 1,000 dollars after subtracting withholding and refundable credits, or
- You paid, through withholding and estimated payments, at least the lesser of:
- 90 percent of the tax for the current year, or
- 100 percent of the tax shown on the prior year return
The second of those is the useful one, because the prior year’s tax is a fixed, known, already filed number. You are not forecasting anything. Take last year’s total tax, divide it into the four payments, and the penalty is off the table regardless of how the current year turns out. If this year is much better than last, you will owe more in April, but you will not be penalised for it.
One condition attaches: the prior year return has to cover all twelve months.
The 110 percent rule, which is widely stated wrongly
If your adjusted gross income for the prior year was more than 150,000 dollars, or more than 75,000 dollars if you are married filing separately, the prior year figure is not 100 percent. It is 110 percent.
So at that income level the safe harbour is the lesser of 90 percent of this year’s tax or 110 percent of last year’s. Somebody who crossed that threshold last year, pays exactly last year’s tax in four instalments, and assumes they are covered is short by a tenth and penalised for it.
This is worth checking rather than assuming, because a great deal of published material, and more than one summary of the IRS’s own publication, states 100 percent here. It is 110.
What the safe harbour does not do
It removes the penalty. It does not cap or reduce the tax.
This is the most common misunderstanding of the whole subject, and it is an expensive one, because it feels like good news. Somebody pays last year’s tax across the four dates, believes they have settled the year, and treats the rest of the money as theirs. The balance is still due with the return in April, and by then it has often been spent.
Think of the safe harbour as protection against a penalty, not as a payment plan that closes the year.
When income arrives unevenly
Equal instalments assume income arrives evenly, and for a lot of self employed people it does not. A year where almost everything landed in the autumn produces a penalty for the April and June payments, for money that had not been earned yet.
The annualised income instalment method exists for exactly this. It works out each instalment from the income actually received by that point in the year rather than from a flat quarter of the total. It is more work and it needs reasonable records through the year, so it earns its complexity when income genuinely was lopsided and not otherwise.
The penalty itself is computed on Form 2210, which is also where the annualised method is applied.
The waivers, which are narrower than people hope
The penalty can be waived in limited circumstances, including where the underpayment was caused by a casualty, a disaster, or another unusual circumstance, and where somebody retired after reaching 62 or became disabled and the underpayment was for reasonable cause.
Not knowing the payments were due is not on that list.
What to do about it
If you have a prior year return covering twelve months, start there. Take the tax from it, apply 110 percent if your prior year AGI was over the threshold, divide by four, and pay on the four dates. It is the lowest effort route to certainty, and it does not require you to know what this year holds.
Then set aside separately for the balance, because the safe harbour is not the bill. How much to set aside depends on what comes off the income first, and which expenses actually hold up decides that.
A year sized in advance costs less than a year reconstructed in April, which is the argument for having the return planned rather than assembled.