What Is the Required Annual Payment to Avoid a Penalty?

The U.S. tax system operates on a “pay-as-you-go” basis, meaning you are required to pay income tax as you earn or receive income. If you don’t pay enough tax through withholding or estimated tax payments, you may be charged a penalty for underpayment. The Internal Revenue Service (IRS) has established specific guidelines to help taxpayers determine the minimum amount they need to pay during the year to be compliant. Following these guidelines allows you to avoid unexpected penalties when you file your annual tax return.

The Safe Harbor Rules for Avoiding a Penalty

To avoid an underpayment penalty, the IRS provides “safe harbor” rules. These are specific payment thresholds that, if met, protect you from a penalty, even if you still owe some tax when you file your return. Satisfying just one of these tests is sufficient to avoid the penalty.

The first test is the 90% rule. Under this provision, you must pay at least 90% of the total tax you owe for the current tax year. For example, if you calculate your total tax liability for the year to be $10,000, you must have paid at least $9,000 through withholding, estimated payments, or a combination of both.

A second option is the 100% rule. This rule requires you to pay at least 100% of the total tax that was shown on your prior year’s tax return. For this rule to apply, your previous year’s tax return must have covered a full 12-month period. If your total tax on last year’s return was $8,000, paying that same amount during the current year would satisfy this safe harbor provision.

For higher-income taxpayers, the 100% rule is modified. If your Adjusted Gross Income (AGI) on your prior year’s return was more than $150,000 (or more than $75,000 if you are married and filing separately), you must pay at least 110% of your prior year’s tax liability to meet the safe harbor requirement. For instance, if your AGI last year was $200,000 and your tax was $40,000, you would need to pay at least $44,000 during the current year.

Methods for Meeting Your Payment Obligation

For individuals who are employees, the most common method is tax withholding from their paychecks. You can adjust the amount of tax your employer withholds by submitting a revised Form W-4, Employee’s Withholding Certificate. By decreasing the number of allowances or requesting an additional amount to be withheld from each paycheck, you can increase your total tax payments to meet your safe harbor target.

For individuals who are self-employed or have significant income from sources not subject to withholding, such as interest, dividends, or capital gains, estimated tax payments are the standard method. These payments are made using Form 1040-ES, Estimated Tax for Individuals. The annual payment is typically divided into four installments. For the 2025 tax year, payments are due April 15, 2025; June 16, 2025; September 15, 2025; and January 15, 2026. Payments can be mailed with a payment voucher from Form 1040-ES or submitted electronically through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS).

Exceptions and Special Conditions

Some taxpayers have financial circumstances that do not align with the standard quarterly payment schedule. For those with income that is not earned evenly throughout the year, such as freelancers with fluctuating project income or individuals who sell an asset late in the year, the annualized income installment method offers an alternative. This method allows you to adjust your estimated payments based on when you actually receive your income, making smaller payments in lower-income quarters and larger payments in higher-income quarters. This calculation is performed using Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts.

The IRS may waive the underpayment penalty under specific, limited circumstances. A waiver can be granted if you failed to make required payments because of a casualty, disaster, or other unusual event where it would be inequitable to impose the penalty. Additionally, a waiver is available for individuals who retired after reaching age 62 or became disabled during the tax year for which the payments were due, provided they had a reasonable cause for not paying the tax. These waivers are not automatic and must be requested.

Special rules apply to farmers and fishermen. To qualify, at least two-thirds of a taxpayer’s gross income must come from farming or fishing. These taxpayers can avoid an underpayment penalty by paying the lesser of 66 ⅔% of their current year’s tax liability or 100% of their prior year’s tax. They have a single estimated tax deadline of January 15 of the following year. Alternatively, they can skip making an estimated payment altogether if they file their tax return and pay the full amount owed by March 1 of the following year.