How to avoid the estimated tax penalty (2026)

How do I avoid the IRS underpayment penalty as a freelancer or small business owner?

Pay enough, early enough. According to the IRS underpayment penalty page, you may avoid the penalty if either of these is true:

Your filed return shows you owe less than $1,000, or
You paid at least 90% of this year's tax or 100% of last year's, whichever is less. Per the 2026 Form 1040-ES, use 110% if your 2025 AGI was more than $150,000 ($75,000 if married filing separately).

The payments have to arrive on time each quarter, not just by year end: for 2026 the dates are Apr 15, Jun 15, Sep 15 2026; Jan 15 2027. Most people with steady income aim for the "100% (or 110%) of last year" number because it's known in advance.

Formula: Required 2026 payments = the smaller of (90% × your 2026 tax) or (100% × your 2025 tax, or 110% if 2025 AGI was over $150,000), minus withholding. Divide by 4 for each due date.

Worked example: 2025 tax $8,000 (AGI $60,000); expected 2026 tax $12,000. 90% × $12,000 = $10,800. 100% × $8,000 = $8,000. The smaller is $8,000, so $2,000 by each of the four dates. With 2025 AGI over $150,000 it would be 110% × $8,000 = $8,800, or $2,200 a quarter. You still owe the rest of your 2026 tax when you file, but that payment alone doesn't trigger the penalty.

Last verified November 4, 2026 against IRS: Underpayment of Estimated Tax by Individuals Penalty, IRS Form 1040-ES (2026), Estimated Tax for Individuals (PDF), IRS: Estimated taxes. Fee change tracker · How we verify

The three safe harbors side by side

Test	What you need	When it fits
Small balance	Your return shows you owe less than $1,000 after withholding and refundable credits	Mostly W-2 income with a small side business
90% of this year	Paid in at least 90% of your 2026 tax	Your income is falling, so this year's tax will be lower than last year's
100% / 110% of last year	Paid in at least 100% of your 2025 tax (110% if 2025 AGI over $150,000; $75,000 married filing separately)	Your income is growing; the number is fixed from your 2025 return

Illustrative numbers. Your 2025 "tax" for this test is the total tax on your return minus refundable credits, as the IRS describes it; the 1040-ES worksheet walks through it. This test also excludes people with at least two-thirds of income from farming or fishing, who follow separate rules.

How the IRS figures the penalty

The IRS says it figures the penalty on the amount underpaid, how long it was underpaid, and the IRS's published quarterly underpayment interest rate. That means it is figured quarter by quarter: paying a big lump in January doesn't erase a shortfall from April. If you owe it, the IRS sends you a notice.

If your income came in unevenly

Seasonal businesses (lawn care, holiday Etsy shops) often earn most of their income late in the year. The IRS points to Form 2210, Schedule AI (Annualized Income Installment Method), which matches each payment to when the income was actually earned and can lower or remove the penalty for early quarters. It also says the penalty may be removed or reduced for a casualty, local disaster or other unusual circumstance, or if you retired in the past 2 years after reaching age 62, or became disabled, with reasonable cause.

A simple routine that keeps you in the safe harbor

In January, write down your 2025 total tax and AGI from last year's return.
Work out the 100% (or 110%) number and divide by four.
Move a share of every client payment into a separate tax account so each quarterly payment is already sitting there (the IRS says weekly, bi-weekly or monthly is allowed as long as enough is paid by each due date).
Check midyear: if income dropped a lot, the 90%-of-this-year test may be smaller.

See the 2026 estimated tax dates and set-aside planner for the four dates and how much to hold back for each, and how to calculate self-employment tax for the part of your tax that comes from the business.

Questions

What is the safe harbor for estimated taxes in 2026?

Pay in at least the smaller of 90% of your 2026 tax or 100% of your 2025 tax, on time each quarter. The 2026 Form 1040-ES says to use 110% of 2025 tax if your 2025 AGI was more than $150,000 ($75,000 if married filing separately). You may also avoid the penalty if your return shows you owe less than $1,000.

Do I owe a penalty if I owe less than $1,000?

The IRS says you may avoid the underpayment penalty if your filed tax return shows you owe less than $1,000.

What are the 2026 estimated tax due dates?

Apr 15, Jun 15, Sep 15 2026; Jan 15 2027, per the 2026 Form 1040-ES. If a date falls on a weekend or legal holiday, the payment is on time if made the next business day.

Can I make one big payment in January instead?

It may not avoid the penalty. The IRS figures it for each period the payment was due and underpaid, so a late lump sum can still leave a penalty for the earlier quarters, unless the annualized income method (Form 2210 Schedule AI) shows your income really came in late.

How is the estimated tax penalty calculated?

The IRS says it is based on the amount of the underpayment, the period it was due and underpaid, and the published quarterly interest rates for underpayments. It also charges interest on penalties until paid.

Does withholding from a W-2 job count?

Yes. The IRS says there are two ways to pay tax during the year: withholding and quarterly estimated payments. Withholding counts toward the safe harbor, so a side-business owner can sometimes raise their W-4 withholding instead of making estimated payments.

Is this tax advice?

No. It summarizes IRS pages and the 2026 Form 1040-ES. Your situation may differ; ask a tax professional before relying on it.

General information, not tax, legal or accounting advice. Rates change: check the linked official source before you rely on a number. Not yet reviewed by a CPA or EA.