Estimated Tax Safe Harbor: The 90%, 100% and 110% Rules

A safe harbor here is a floor, not a forecast. It is the smallest total, paid on time through withholding and estimated payments, that keeps the underpayment penalty away whatever the final tax for the year turns out to be. The Code calls it the required annual payment (IRC 6654(d)). This page covers the three percentages and the conditions attached to them, how withholding is counted, a late-year payroll fix, worked numbers for a high-income owner, and the corporate rules. What a missed installment costs is covered in the IRS underpayment penalty, and the calendar in estimated tax due dates.

The required annual payment: 90%, 100% or 110%

For individuals, the required annual payment is the lesser of 90% of the tax shown on this year's return (90% of the tax if no return is filed) or 100% of the tax shown on last year's return (IRC 6654(d)(1)(B)). Two adjustments change the percentages:

• 110% for higher incomes. If the adjusted gross income on last year's return exceeded $150,000, the prior-year figure becomes 110% (IRC 6654(d)(1)(C)(i)). The $150,000 is the same whether that return was single or joint; the statute's only lower threshold, $75,000, applies to a married person who files separately for the year being paid (IRC 6654(d)(1)(C)(ii)). For 2026 payments, Publication 505 points to line 11b of the 2025 Form 1040 as the AGI to test.
• 66⅔% for farmers and fishermen. When at least two-thirds of gross income for 2025 or 2026 comes from farming or fishing, 66⅔% replaces 90% and the 110% rule drops away (IRC 6654(i); Form 1040-ES (2026)).

What counts as tax for the safe harbor

The percentages apply to a defined “tax” (IRC 6654(f)): income tax, including the alternative minimum tax, plus self-employment tax and the net investment income tax, minus every credit except the credit for withholding. Additional Medicare Tax that was not withheld is treated the same way as self-employment tax for this purpose (IRC 6654(m)). So the safe harbor covers self-employment tax along with income tax; there is no separate harbor for it. On Form 2210, the prior-year side lives on line 8: the prior year's listed taxes minus the listed refundable credits, raised to 110% when the AGI test is met (Instructions for Form 2210).

The prior-year option has two conditions

Last year's tax is usable only if last year was a 12-month tax year and you filed a return for it (IRC 6654(d)(1)(B)). Miss either and the only test left is 90% of this year's tax; Form 2210 then leaves line 8 blank and uses the 90% figure. Two life events change the prior-year number itself:

• Marriage or divorce. If you file separately for 2026 after a joint 2025 return, your 2025 tax is your share of the joint tax: figure what each spouse would have owed on separate 2025 returns, then apply your portion of that total to the joint tax. If you file jointly for 2026 after separate 2025 returns, add the two separate 2025 taxes together (Publication 505).
• A year with no liability. If you owed nothing for a full 12-month 2025 and were a U.S. citizen or resident all year, no 2026 penalty applies at all (IRC 6654(e)(2)). Form 1040-ES (2026) treats a total tax of zero, or no requirement to file, as no liability.

Timing matters in a growth year. The 110% test looks back at 2025 AGI, so an owner whose income first crosses $150,000 in 2026 can still use 100% of the 2025 tax for the 2026 installments; 110% arrives with the 2027 installments. The prior-year number is fixed once the 2025 return is filed. The 90% number is measured against the tax that actually lands on the 2026 return, which no one knows until the year closes.

Four equal installments, unless you annualize

Reaching the required annual payment in total is not enough; it has to arrive on schedule. Each required installment is 25% of the required annual payment (IRC 6654(d)(1)(A)), and each is tested on its own due date. Paying more often, or paying the whole year by April 15, is allowed (Form 1040-ES (2026)). The one sanctioned way to pay less early is the annualized income installment method: when the installment figured on the income actually earned by a due date is smaller, that smaller amount becomes the required installment, and the reduction is added to the next regular installment (IRC 6654(d)(2)). It requires Form 2210 with Schedule AI, explained in the underpayment penalty guide.

Withholding counts as paid evenly through the year

Withholding gets different timing from estimated payments. All income tax withheld during the year is treated as paid in equal parts on the four due dates, unless you establish the dates it was actually withheld (IRC 6654(g)(1)), and you may make that choice separately for wage withholding and for other withholding (IRC 6654(g)(2)). The Form 2210 instructions state it in practical terms: you are considered to have paid one-fourth of your withholding on each payment due date unless you show otherwise, and showing otherwise means checking box D.

The effect runs in the owner's favor. A dollar of estimated tax paid in December counts from December. A dollar withheld from a December paycheck counts as 25 cents paid on each of April 15, June 15, September 15 and January 15.

Closing a gap with a late-year payroll adjustment

That rule lets an owner on payroll repair an estimated tax shortfall after the fact. An S corporation shareholder who works in the business and takes a W-2 salary can raise federal income tax withholding in the last payrolls of the year, with a new Form W-4 (Step 4(c) takes “any additional tax you want withheld each pay period”) or with withholding on a year-end bonus. The extra tax is spread back across all four installments. Three practical limits:

• It has to run through real payroll. Withholding comes out of wages actually paid, so the December pay must be large enough to cover it, and the company deposits and reports it like any other withholding.
• It spreads four ways. To fill a shortfall of $1 in each of the first three installments, withhold $4 extra; the fourth dollar lands on January 15, so the January estimated payment drops by $1.
• It needs W-2 wages. A sole proprietor has no paycheck from the business to withhold from.

BEG runs owner payroll, including extra withholding and the deposits and filings that go with it, through Managed Payroll, from $25 per employee per month. How owners split salary and distributions in the first place is covered in how to pay yourself from an S corp.

Worked illustrations for a high-income owner

1. Which test is lower depends on the year

In the growth year the prior-year test is $30,000 cheaper and leaves $48,000 to pay with the return, penalty-free. In the flat and down years the current-year test is lower, but only if the 2026 tax really lands where it was projected; the prior-year figure carries no such risk. Had 2025 AGI been $150,000 or less, the prior-year figure would have been $120,000.

2. Closing a gap in December: estimated payment or withholding

Growth year, $33,000 per installment. One spouse is an S corporation shareholder-employee whose salary carries $60,000 of federal income tax withholding for the year, counted as $15,000 on each due date. They paid $15,000 of estimated tax on April 15, June 15 and September 15, falling $3,000 short each time, and spot the gap in December.

Same $132,000, same December timing, different result. As an estimated payment, the $9,000 cures only September's shortfall, on December 15, and the earlier gaps had already rolled forward: April's $3,000 ran 61 days at 6% ($30.08), June's $6,000 ran 15 days at 6% and 77 at 7% ($103.40), and September's $9,000 ran 91 days at 7% ($157.07). As withholding, $12,000 counts as $3,000 on each of the four dates, which fills every gap from the start and trims the January payment by $3,000. The 2026 rates come from the IRS quarterly interest rates page.

Corporations: the 100% rules and the large corporation limit

Corporations get no 90% test and no 110% rule. The required annual payment is the lesser of 100% of the tax shown on the current year's return or 100% of the tax shown on the prior year's, and the prior-year option works only if that year was 12 months long and its return showed a liability (IRC 6655(d)(1)(B)). No penalty applies when the year's tax is under $500 (IRC 6655(f)).

• Large corporations. A corporation with $1,000,000 or more of taxable income in any of the 3 preceding tax years, figured without net operating loss or capital loss carrybacks and carryovers, is a large corporation, and members of a controlled group divide the $1,000,000 (IRC 6655(g)(2)). It may use the prior-year figure only for the first installment, and whatever that saves is added to the second installment (IRC 6655(d)(2)).
• Amended prior-year returns. For a corporation, an amended prior-year return counts as the prior-year return only for installments due after it is filed (Instructions for Form 2220).
• S corporations. The large corporation limit does not apply to them, and their prior-year test is built from the current year's built-in gains and recapture taxes plus the prior year's excess net passive income tax (IRC 6655(g)(4)).
• Uneven income. Corporations can also use the annualized income installment method or, with a seasonal pattern, the adjusted seasonal installment method (IRC 6655(e)). Either one, or a large corporation's first-installment rule, means attaching Form 2220 to the return.

3. Large versus not large

Corporation A can pay $150,000 through installments and the other $250,000 with its 2026 return. Corporation B gets relief only in April: the $62,500 it did not pay then is added to June, so by the end of the year it has paid the full $400,000.

Sources: 26 U.S.C. 6654, failure by individual to pay estimated income tax; 26 U.S.C. 6655, failure by corporation to pay estimated income tax; IRS, Form 1040-ES (2026), Estimated Tax for Individuals; IRS Publication 505 (2026), Tax Withholding and Estimated Tax; IRS, Form 2210 (2025); IRS, Instructions for Form 2210 (2025); IRS, Instructions for Form 2220 (2025); IRS, Form W-4 (2026), Employee’s Withholding Certificate; IRS, Quarterly interest rates (reviewed September 10, 2026). Rules and figures checked against these sources in September 2026; illustrations computed in Python. This is general information, not tax advice for your situation. Tax services are provided by licensed tax professionals under a separate engagement agreement. BEG does not provide tax advice.