Updated August 2, 2026. Quick answer: you avoid the underpayment penalty by paying, through withholding or estimates, the lesser of 90% of this year’s tax or 100% of last year’s — 110% if last year’s AGI exceeded $150,000 ($75,000 if married filing separately). And no penalty applies at all if your balance comes in under $1,000.
Why the prior-year test is the one to use
Because it is knowable. Last year’s total tax is a number printed on a return you already filed. This year’s is a forecast, and in retirement the forecast is genuinely hard — a Roth conversion, a capital gain, a first RMD, a property sale can each move it by five figures.
So the practical rule for anyone whose income is rising or unpredictable: aim at the prior-year figure, hit it exactly, and stop worrying about the estimate. You will owe the balance in April, but you will owe no penalty on it.
The AGI threshold that catches people out
Above $150,000 of prior-year AGI the prior-year test becomes 110%, not 100%. This is measured on last year’s AGI, so the year you sell a business or convert a large IRA sets a harder target for the following year — which is exactly when people relax because the big event is behind them. And for married filing separately the threshold is $75,000, not $150,000.
The four dates
| Payment 1 | April 15, 2026 |
| Payment 2 | June 15, 2026 |
| Payment 3 | September 15, 2026 |
| Payment 4 | January 15, 2027 |
The January payment is not required if the return is filed and the balance paid by February 1, 2027.
Note they are not quarterly in any ordinary sense: the gaps are three months, two months, three months, four months. Diaries set to “every three months” miss the June date, which is the most commonly missed of the four.
What the penalty actually is
Not a fine. “The penalty is imposed on each underpayment for the number of days it remains unpaid.” at the federal short-term rate plus three percentage points (IRC 6621(a)(2)). Two consequences worth understanding: a shortfall in the first quarter costs more than the same shortfall in the fourth, because it is outstanding longer; and paying late is better than not paying, because the meter stops when the money arrives.
And the exemption: “No addition to tax shall be imposed under subsection (a) … if the tax shown on the return for such taxable year … is less than $1,000.” (IRC 6654(e)(1)). A balance under $1,000 carries no penalty however it arose.
Withholding has an advantage estimates do not
Money withheld is treated as paid evenly across the year regardless of when it was actually withheld, while an estimated payment is credited on the day it lands. That asymmetry is the basis of the December withholding move, and it is why the same dollars can produce a penalty or not depending only on the route they take.
The calculator gives your target and your gap from your own figures.
Safe-harbour tests from IRC section 6654(d)(1)(B)-(C) and IRS Publication 505; penalty mechanics from sections 6654(a) and 6621(a)(2); due dates from the 2026 Form 1040-ES. Read August 2026. General information, not tax advice.
If this is your first self-employed year, the prior-year test above is measured on a return with little or no self-employment income in it — which makes year one unusually easy and year two the one that catches people.