The safe harbor rule

Pay 100% of last year’s total tax across four equal instalments and you cannot be penalised this year, no matter what you actually earn. irs.gov

That sentence removes most of the difficulty from quarterly taxes, and almost nobody acts on it. The usual approach is to guess at the current year and hope. The safe harbor asks you to look backwards instead, at a number you already know exactly.

The three doors

You avoid the underpayment penalty if your payments and withholding reach any one of: irs.gov

Test	Amount	You need to know
Current year	90% of this year’s tax	What you will owe — an estimate
Prior year	100% of last year’s tax	Line on last year’s return
Prior year, higher earners	110% of last year’s tax	Same line, if prior AGI was over $150,000

You need only one. The IRS applies whichever helps you.

Why the middle one is the useful one

The 90% test requires predicting a year you have not finished. In April you are guessing at December.

The 100% test requires reading one line off a return you already filed. It is not an estimate at all — it is arithmetic on a known number.

Worked through

A developer with a known prior year

A developer owed $12,400 in federal tax for 2025, with an AGI of $88,000 — below the $150,000 line, so the 100% test applies rather than 110%. irs.gov


Prior year tax	$12,400
Safe harbor target	$12,400
Each quarterly payment	$3,100

Four payments of $3,100, on 15 April, 15 June, 15 September and 15 January. Whatever 2026 turns out to be, no underpayment penalty.

If 2026 is a much better year, the extra is settled in April 2027. That is a cash-flow decision — money in your account rather than the IRS’s for up to a year — not a penalty.

The $150,000 line

If your AGI on the prior-year return was above $150,000, the prior-year test becomes 110% rather than 100%. irs.gov For married filing separately the threshold is $75,000.

Two details that catch people:

It is prior-year AGI, not this year’s. A big year raises the bar for the following year, not the current one.

And it is AGI, not profit. W-2 wages, a spouse’s income and investment income all count toward it, so a freelancer with modest self-employment income and a high-earning spouse can be over the line without feeling like a high earner.

When the safe harbor does not help

Your first year of self-employment. There is no prior-year liability to point at, so the 100% door does not exist. You are left with the 90% test and a genuine estimate. Recalculating each quarter with actual figures beats committing in April to a projection.

A prior year that was much larger. If last year was exceptional and this year is ordinary, 100% of last year could be far more cash than you owe. The 90% test on the smaller current year is cheaper — or the annualized method if the income is also uneven.

You want the money working elsewhere. The safe harbor is protection from a penalty, not an obligation. Paying less and settling in April is a legitimate choice if you accept the penalty on the shortfall, which is charged as interest rather than as a fine.