Dollar figures in this piece are for tax year 2026.
The federal underpayment penalty is not a fine for owing money in April. It applies when the tax you paid in during the year, through withholding and estimated payments, fell short of a target on one of four due dates. The target is the smaller of 90% of your 2026 tax or 100% of your 2025 tax. If your 2025 adjusted gross income was above $150,000, the prior-year figure is 110%, not 100%.
Hit the target and you owe no penalty, however large the April balance turns out to be. This page covers what the basic rule leaves out: what counts as last year's tax, how the lesser-of choice works with real numbers, why each installment is judged separately, and when the annualized method does better. For who pays and when, start with the quarterly estimated taxes guide. In the fourth quarter of 2026 the September 15 payment has passed, and January 15, 2027 is the next date that matters.
The two tests and the 110% rule
The Code sets each required installment at 25% of a "required annual payment." That payment is the lesser of two numbers: 90% of the tax shown on your return for the year, or 100% of the tax shown on your return for the preceding year. Whichever is smaller is your target. The prior-year test caps what you can be asked to pay; it is not a floor.
That test has three conditions. The preceding year must have been a 12-month year, you must have filed a return for it, and if your AGI on that return exceeded $150,000, 100% becomes 110%. For a married person filing separately the AGI line is $75,000. For 2025, Pub. 505 says AGI is the amount on Form 1040, line 11b.
Two exceptions sit outside the formula. No addition to tax applies if the tax shown on the return, reduced by withholding, is under $1,000. None applies either if you had no tax liability for the preceding 12-month year and were a citizen or resident throughout it. Farmers and fishers use different percentages and a single January installment, so this page leaves them aside.
What counts as last year's tax
The prior-year number is a defined total, not just the line you remember from the return. The Form 2210 instructions (2025 edition) build the comparison year's tax from Form 1040 line 22 plus the other taxes listed from Schedule 2, then subtract the refundable credits. Check those line references against the 2026 edition when it is out.
Filing status adds two wrinkles. File separately in 2026 after filing jointly for 2025, and your 2025 tax is your share of the joint tax. File jointly in 2026 after not filing jointly for 2025, and you add your tax and your spouse's. If you did not file a 2025 return, or the year was shorter than 12 months, only the 90% test is available.
- 90% of 2026 tax
- 110% of 2025 tax ($62,000)
- Required (the smaller)
| 90% of 2026 tax | 110% of 2025 tax ($62,000) | Required (the smaller) | |
|---|---|---|---|
| 2026 tax $55,000 | $49,500 | $68,200 | $49,500 |
| 2026 tax $84,000 | $75,600 | $68,200 | $68,200 |
| 2026 tax $120,000 | $108,000 | $68,200 | $68,200 |
The 90% test governs when 2026 tax comes in under the prior-year target, and the prior-year test governs when 2026 is bigger.
Computed: 90% of 2026 tax versus 110% of $62,000 of 2025 tax, hypothetical inputs
Example, hypothetical: choosing the target
A married couple filing jointly had 2025 AGI of $310,000 and total tax for the prior-year test of $62,000. Their 2025 return covered 12 months, so the prior-year test is 110%: $62,000 times 1.10 is $68,200. If their 2026 tax comes to $84,000, then 90% is $75,600, the smaller figure is $68,200, and the required installment is $17,050 on each of four dates.
The chart above shows why the prior-year route is a planning tool. At an $84,000 or $120,000 tax year, the couple must pay in $68,200 and nothing more to avoid the penalty, even though the actual bill is $15,800 or $51,800 higher. At a $55,000 tax year, 90% is only $49,500, and that is the target. They would have to know that in advance, which is the weakness of relying on a forecast.
The safe harbor protects you from the penalty only. In the $120,000 case the couple still owes the remaining $51,800 of 2026 tax with the return. An extension does not move that payment date.
The four installments
- APR1520261stIncome period it covers Jan 1 to Mar 31 Required if 110% of 2025 tax is the target $17,050
- JUN1520262ndIncome period it covers Apr 1 to May 31 Required if 110% of 2025 tax is the target $17,050
- SEP1520263rdIncome period it covers Jun 1 to Aug 31 Required if 110% of 2025 tax is the target $17,050
- JAN1520274thIncome period it covers Sep 1 to Dec 31 Required if 110% of 2025 tax is the target $17,050
Each required installment is 25% of the required annual payment: here $17,050, using the example above.
See it as a table
| Installment | Due date | Income period it covers | Required if 110% of 2025 tax is the target |
|---|---|---|---|
| 1st | April 15, 2026 | Jan 1 to Mar 31 | $17,050 |
| 2nd | June 15, 2026 | Apr 1 to May 31 | $17,050 |
| 3rd | September 15, 2026 | Jun 1 to Aug 31 | $17,050 |
| 4th | January 15, 2027 | Sep 1 to Dec 31 | $17,050 |
Each installment is its own test
The penalty is figured separately for each due date. Pay nothing until December, then send the full year's target, and you still owe the addition to tax for the first three installments. The underpayment ran from each due date until the day your money arrived, even if you are due a refund when you file. Payments are credited to the oldest unpaid installment first, so a late lump sum cures the earliest gap first.
Paying early is harmless. Paying late only stops the clock from the day the money arrives; it does not reach back.
If you file your 2026 return by January 31, 2027 and pay the balance in full, no addition to tax applies for the fourth installment. Pub. 505 gives an example: pay nothing in 2026, file and pay on January 26, and you may still owe a penalty on the first three installments, figured to that date. January 31, 2027 is a Sunday, so I would file by Friday, January 29.
When income shows up late: the annualized method
The regular method assumes you earned the year in four equal slices. If your income was lopsided, because the business is seasonal or a large gain landed in the fall, Schedule AI of Form 2210 measures each installment against the income you had actually received by that date. The periods are cumulative: January 1 through March 31, through May 31, through August 31, and the full year. Each period's income is annualized by multiplying by 4, 2.4, 1.5 and 1, and the required installments are then 22.5%, 45%, 67.5% and 90% of the resulting tax, less earlier installments.
Two rules come with it. Use Schedule AI for any due date and you must use it for all of them, and you must file Form 2210 with your return. On the cash method, you count income received and deductions actually paid in each period.
Example, hypothetical, 2026, single, using the Pub. 505 rate schedule and the $16,100 standard deduction: a consultant has AGI of $15,000 through March, $30,000 through May, $55,000 through August and $240,000 for the year, so $185,000 arrives from September on. Full-year tax is $48,104, and 90% of it is $43,293.60 (their 2025 tax was far higher, so the 90% test is the smaller). The regular method requires $10,823.40 per installment. Schedule AI requires $1,129.50, $2,025.00, $3,136.50 and $37,002.60. This simplified version ignores self-employment tax and the QBI deduction, which the real schedule includes.
- Regular method
- Annualized (Schedule AI)
| Regular method | Annualized (Schedule AI) | |
|---|---|---|
| Apr 15 | $10,823.40 | $1,129.50 |
| Jun 15 | $10,823.40 | $2,025 |
| Sep 15 | $10,823.40 | $3,136.50 |
| Jan 15 | $10,823.40 | $37,002.60 |
Because most of the income arrives after August 31, the annualized method pushes nearly all of the required payment into January.
Computed: 90% of $48,104 of 2026 tax; Pub. 505 (2026) Schedule X; simplified, hypothetical inputs
Simple interest at an assumed 7% from each due date until payment, to April 15, 2027. The actual rate is reset quarterly.
The notice says it that way. Here is what it means.
| What you read | What it means |
|---|---|
| The smaller of 90% of this year's tax or 100% (or 110%) of last year's tax | |
| The penalty: interest on each underpayment for the days it was outstanding | |
| Testing each installment against the income you had actually received by that date | |
| 2025, for a 2026 test. It must have been a 12-month year with a filed return | |
| One quarter counted on each due date, unless you show the actual dates |
The usual way versus doing it right
One payment, one guess
- Send one large payment in the fourth quarter
- Use 100% of last year's tax whatever last year's AGI was
- Treat the safe harbor as cover for the April balance
Test every installment
- Spread the target across the four due dates
- Use 110% when 2025 AGI was above $150,000
- Expect the balance due with the return, safe harbor or not
What the penalty is
The addition to tax is interest at the underpayment rate, which is the federal short-term rate plus 3 percentage points, applied to each underpayment for the days it was outstanding. The short-term rate resets every quarter, so check the current rate before running your own numbers. The 7% above is an assumption for illustration. Section 6622 compounds most tax interest daily but carves out the estimated-tax addition, so this penalty is figured without daily compounding.
Unless a box on Form 2210 requires it, you do not need to file the form. The IRS figures the penalty and sends a bill. You do file it to use the annualized method or to request a waiver. Waivers exist for a casualty, disaster or other unusual circumstance, and for an underpayment due to reasonable cause in a year when you retired after age 62 or became disabled, or the year after.
Common mistakes
- Using 100% of last year's tax when last year's AGI was above $150,000, which understates the target by 10%.
- Treating the safe harbor as protection from the balance due, when it only protects against the penalty.
- Relying on the prior-year test without a 12-month 2025 return, or after changing filing status without checking whose tax is whose.
- Making one large payment in the fourth quarter and assuming it erases the penalty for the first three installments.
- Choosing the annualized method for one installment and not the others, or forgetting that using it means attaching Form 2210.
- Counting a December estimated payment as if it had been paid evenly, when only withholding is treated that way.
What to do before January 15, 2027
Pull the 2025 numbers
Find 2025 total tax and AGI (Form 1040, line 11b) and compute 100% or 110% of the tax. That is your prior-year target.
Estimate 2026 tax
Run a projection and take 90%. The smaller of the two is the amount that must be paid in through withholding and estimates.
Add up what is paid
Total 2026 withholding and the estimated payments made on April 15, June 15 and September 15, then subtract that from the target.
Close the gap
A W-4 change on remaining paychecks covers the whole year. Otherwise pay the shortfall by January 15, 2027, or file and pay in full by January 31.
Test the annualized method
If most 2026 income arrived late, work Schedule AI before the April filing. It only helps when income was lopsided, and you must file Form 2210 to use it.
If your numbers are lumpy, or you want a payment schedule built for you, that is the work of tax planning. Contractors, owners and consultants will find more on the self-employed page.
