What is Estimated Tax Safe Harbor?

Self-employed people and owners of pass-through businesses usually pay income and self-employment tax through quarterly estimated payments. If they pay too little, an underpayment penalty applies. The safe harbor rules, described in Publication 505, set payment levels that avoid the penalty.

The individual safe harbors

Individuals generally avoid the underpayment penalty if total withholding and timely estimated payments equal at least the smaller of:

• 90% of the current year's tax, or
• 100% of the prior year's tax, increased to 110% if prior-year adjusted gross income was more than $150,000 ($75,000 if married filing separately)

There is also generally no penalty if the balance due after withholding and credits is less than $1,000.

Why the prior-year method is popular

Paying 100% or 110% of last year's tax in four equal installments is predictable: you know the amount at the start of the year. Any additional tax for a profitable year is then due with the return, without penalty. The trade-off is a larger bill in April.

Timing still matters

Installments are generally due April 15, June 15, September 15 and January 15. Paying the full safe harbor amount late in the year does not fully cure earlier underpayments, although withholding is treated as paid evenly through the year.

Corporations

C corporations have their own rules, generally requiring installments based on current-year tax or, for some, prior-year tax.

How we help

We provide year-to-date profit before each due date so clients can choose between the safe harbor and a current-year estimate. See estimated tax payments for the self-employed and our tax deadlines calendar.

Related terms

• Debits and Credits: Debits and credits are the two sides of every bookkeeping entry; each account type increases on one side and decreases on the other.
• Adjusted Gross Income (AGI): Adjusted gross income is total income minus certain adjustments, a key figure on an individual tax return.
• Self-Employment Tax: Self-employment tax is the Social Security and Medicare tax paid by people who work for themselves, calculated on net earnings from self-employment.

Browse more definitions in the small business glossary.