High Income? Your Estimated Tax Safe Harbor Is 110%, Not 100%

2026-10-19 · RKube Services

If your 2025 AGI was over $150,000, the prior-year safe harbor for 2026 estimated tax is 110%, not 100%. A worked example and how to close the gap before January 15.

Most people who pay estimated tax have heard the rule of thumb: pay in at least as much as last year's tax and you can't be charged an underpayment penalty, however much you end up owing in April. That rule is real, but it has a second tier that a lot of high earners miss. If your adjusted gross income last year was over $150,000, the number is 110% of last year's tax, not 100%.

The difference sounds small. On a prior-year tax bill of $80,000, it's $8,000 of extra payments, and getting it wrong means a penalty on every quarter that came up short. It matters most in exactly the years when income jumps: an RSU vest, a big bonus, a business sale, a strong year for a rental portfolio or a partnership.

This guide covers who is held to 110%, how the safe harbor compares with paying 90% of this year's tax, why withholding is the most flexible tool you have, how the annualized method helps with lumpy income, and what to do before the January 15, 2027 payment. The rules come from IRS Publication 505 (2026), Tax Withholding and Estimated Tax and Form 2210, Underpayment of Estimated Tax by Individuals.

The rule in one table

Pub 505 sets the required annual payment for 2026 as the smaller of two amounts. Pay at least that much on time, through withholding and estimated payments combined, and there's no underpayment penalty.

Two details from Pub 505 that people skip. First, the test uses last year's AGI, not this year's. A household that earned $140,000 in 2025 and expects $600,000 in 2026 can still use 100% of its 2025 tax. Second, the prior-year option only works if your 2025 return covered a full 12 months.

You generally have to pay estimated tax at all if you expect to owe at least $1,000 for 2026 after withholding and credits.

Why the prior-year number is usually the safer one

In a normal year, 90% of this year's tax and 110% of last year's are close, and either one works. In a year with a large one-time gain, they come far apart, and the prior-year number is the one you can actually know in advance.

That's the point of a safe harbor. You can't know your 2026 tax in April 2026 if a vest, a bonus or a sale is still months away. You do know your 2025 tax once that return is filed. Paying 110% of it, spread on time across the year, removes the penalty question no matter what happens later. You will still owe the rest in April 2027, but without a penalty on top.

The cost of that certainty is the cash you have to set aside for a large April balance. Plan for it separately, in a savings account you don't touch, so the safe harbor doesn't turn into a cash crunch next spring.

The four 2026 payment dates

Estimated tax is due in four installments. Pub 505 lists them for 2026 as:

The required annual payment is split evenly across the four dates by default. A shortfall in an early quarter isn't erased by paying extra later. Form 2210 figures the penalty quarter by quarter, for the days each installment was short, so a late catch-up payment only stops it from growing. That is why the next two tools matter.

Pub 505 also has a January shortcut. If you file your 2026 Form 1040 by January 31, 2027 and pay the rest of the tax you owe, you don't have to make the January 15 payment. That's rarely practical for someone waiting on K-1s or brokerage corrections, but it's there.

Withholding: the lever that fixes earlier quarters

Estimated payments are credited on the date you make them. Withholding works differently. Pub 505 says one-fourth of your withholding is considered withheld on the due date of each payment period, unless you choose to use the actual dates.

So a dollar withheld from a December paycheck counts as if a quarter of it had been paid in April, June, September and January. If you notice in November that you're behind on the 110% target, raising your W-4 withholding for the last few paychecks can cover all four quarters at once. Paying the same amount as a December estimated payment would only cover the fourth.

This works with any withholding: wages, a bonus, supplemental withholding on an RSU vest, or voluntary withholding from a pension or an IRA distribution. If your spouse has a W-2 job, their withholding counts too on a joint return.

The annualized method for income that arrives late

The even split assumes your income comes in evenly. If it doesn't, the annualized income installment method lets you match each installment to the income you had actually earned by then. Pub 505 has a worksheet for estimating payments this way, and if you use it, you must file Form 2210 with your return and complete its Schedule AI to show the IRS the calculation.

This is the method to look at when a large item lands late in the year:

• a business sale that closes in October,
• an RSU vest or option exercise in the fourth quarter,
• a year-end bonus,
• a big capital gain distribution from a fund in December.

With the annualized method, the first three installments are figured on the income you had through March 31, May 31 and August 31. If the big item arrives in October, it only drives the January 15 installment. That's often a real cash advantage over paying a quarter of a large tax bill back in April.

The tradeoff is work. Schedule AI asks for income, deductions and credits for each period, which means keeping year-to-date records you can actually rely on. For someone with good books, it's a few hours of calculation. Without them, it's guesswork.

A worked example

Take a married couple filing jointly. In 2025 their AGI was $310,000 and their total tax was $58,000. In 2026, one spouse sells a share of a business in October, and they expect total 2026 tax of about $95,000. Their W-2 withholding for the year will be $40,000. (The numbers are illustrative.)

Step 1: the required annual payment. Their 2025 AGI was over $150,000, so the prior-year option is 110% of $58,000, or $63,800. The current-year option is 90% of $95,000, or $85,500. The required payment is the smaller one: $63,800.

Step 2: what's left after withholding. $63,800 minus $40,000 of withholding leaves $23,800 to cover with estimates. Under the even split, that's $5,950 due on each of the four dates.

Step 3: what happens if they miss. Suppose they only remember in November, and they've paid nothing yet. Paying $23,800 as a December estimated payment covers the January installment, but the April, June and September installments were each short by $5,950 for months, so Form 2210 would show a penalty for those quarters.

Step 4: the withholding fix. If the working spouse instead raises federal withholding by $23,800 across the November and December paychecks, Pub 505 treats a quarter of it as paid on each due date. All four installments are covered, and there's no penalty, as long as the full $63,800 really comes in through withholding and payments.

Step 5: the April bill. Either way, the couple still owes about $95,000 minus $63,800, or $31,200, when they file in April 2027. The safe harbor protected them from the penalty, not from the tax. The sale proceeds are where that money should come from, and setting it aside at closing avoids a scramble later.

If the sale had been large enough that even 110% of last year left too big a balance for comfort, or if their 2025 tax had been unusually high, they could look at the annualized method instead. Their first three installments would be based on income without the sale, and the sale-related tax would only show up in the January 15 installment.

Mistakes we see in high-income years

1. Using 100% when 110% applies. The 2025 AGI test is easy to forget when last year felt like a normal year.
2. Assuming RSU withholding covers it. Supplemental withholding at the flat federal rate often falls short of a high earner's actual bracket, so the gap shows up at filing time. It still counts toward the safe harbor, but it may not reach the target alone.
3. Paying everything in January. One big January payment fixes the fourth quarter only. Extra withholding or the annualized method is how you fix the first three.
4. Forgetting the state. Most states with an income tax have their own estimated payment rules and safe harbors, and they don't always match the federal 110% threshold. Check your state's rules separately.
5. Not filing Form 2210 when it helps. If you used the annualized method or want withholding counted on actual dates, you have to show it on Form 2210. The IRS won't apply it for you.

Common questions

Does the 110% rule apply if this year's income is lower than last year's?

It can, since the test looks at last year's AGI. But if this year's tax is lower, 90% of this year's tax will often be the smaller required payment, and you can use that instead.

Is the AGI test $150,000 for single filers too?

Yes. Pub 505 uses $150,000 for every filing status except married filing separately, which uses $75,000.

Can I use last year's tax if I didn't file a return last year?

The prior-year option needs a 2025 return that covered a full 12 months. Without one, you're held to 90% of this year's tax.

Does the safe harbor mean I won't owe anything in April?

No. It only removes the underpayment penalty. Any tax above what you paid is still due with your return.

Do I have to use Schedule AI if my income was uneven?

No. It's optional. You'd use it when the even split would show a penalty that the annualized method avoids.

This page is general information, current as of October 16, 2026, not tax advice for your situation.

Expecting a vest, a bonus or a sale before year end? We can work out your 2026 estimate and the withholding change with you: rkubeservices.com.