How to Avoid Estimated Tax Underpayment Penalties in 2026

If your income is not fully covered by withholding, waiting until tax season to find out whether you paid enough can be expensive.

Estimated tax penalties can affect business owners, investors, executives with equity compensation, retirees, and others whose income changes significantly during the year. The good news is that proactive tax planning can often identify a shortfall while there is still time to address it.

How the Estimated Tax Safe Harbor Works

Generally, individuals may need to make estimated tax payments if they expect to owe at least $1,000 when they file and their withholding and refundable credits will not be sufficient.

For 2026, taxpayers can generally avoid an estimated tax underpayment penalty by paying enough through withholding and estimated tax payments to satisfy the lesser of:

• 90% of the tax expected to be due for 2026, or

• 100% of the tax shown on the 2025 return.

For higher-income taxpayers whose 2025 adjusted gross income exceeded $150,000, or $75,000 if married filing separately, the prior-year safe harbor generally increases from 100% to 110% of the 2025 tax.

These rules can make prior-year tax information especially important when determining how much to pay during the current year.

2026 Estimated Tax Payment Dates

For calendar-year individual taxpayers, the 2026 estimated tax installments are generally due:

• April 15, 2026

• June 15, 2026

• September 15, 2026

• January 15, 2027

Paying the full amount by the time you file your tax return does not necessarily eliminate an underpayment penalty. The IRS evaluates whether you paid enough tax during the applicable payment periods.

What Does an Underpayment Cost?

The estimated tax penalty is based on the amount and duration of an underpayment and IRS interest rates that are adjusted quarterly.

For individuals, the IRS underpayment rate is 7% for the third and fourth quarters of 2026. Because the rate can change from quarter to quarter, the cost of an underpayment depends on when the payment was due and when it is ultimately made.

This is why identifying an estimated tax shortfall earlier in the year can be valuable.

Withholding Can Provide Additional Planning Flexibility

One important distinction between estimated tax payments and federal income tax withholding is how the payments are treated for underpayment-penalty purposes.

Federal withholding is generally treated as though it were paid evenly throughout the year, even when additional withholding occurs later in the year. In certain circumstances, taxpayers may elect to use the actual withholding dates instead. This can make increased withholding particularly useful when a tax projection identifies a shortfall later in the year.

Depending on the taxpayer's circumstances, possible planning strategies may include:

• Increasing withholding from remaining W-2 paychecks

• Adjusting withholding associated with bonuses or other supplemental wages

• Reviewing withholding from retirement distributions when applicable

• Making or adjusting quarterly estimated tax payments

• Updating the tax projection after a large capital gain, RSU vest, business-income change, or other significant event

The appropriate strategy depends on the taxpayer's income, withholding, prior-year tax, income timing, and other circumstances.

Uneven Income May Require a Different Approach

Not every taxpayer earns income evenly throughout the year.

A business owner with a strong fourth quarter, an investor who realizes a large gain later in the year, or an employee who receives substantial equity compensation may have a very different tax profile than someone earning steady wages.

In some cases, the annualized income installment method may better reflect when income was actually earned rather than assuming it was earned evenly throughout the year. The IRS provides this method through Form 2210 and its related schedules.

The Value of a Mid-Year or Year-End Tax Projection

The best time to discover an estimated tax shortfall is generally before the year is over.

A tax projection can compare expected income, withholding, estimated payments, investment activity, business income, and other tax items against the applicable safe-harbor requirements. From there, taxpayers can evaluate whether to make any adjustments before the remaining payment deadlines.

For taxpayers with changing income, business activity, investments, or equity compensation, periodically updating the projection can also help reduce the chance of an unexpected balance due at filing time.

Concerned that your 2026 withholding or estimated tax payments may be falling behind?

Weissgarber CPA provides tax preparation and proactive tax planning for individuals and business owners with more complex tax situations.

This article is for general informational purposes only and does not constitute tax or legal advice. Tax outcomes depend on individual circumstances and applicable law.