The 110% safe harbor: what changes when last year's AGI was over 150,000 dollars

The prior year safe harbor is 100 percent of last year's tax, until your AGI crosses 150,000. Then it is 110 percent, and the threshold has not moved in decades.

ExactSplit · Updated March 20, 2026

Why safe harbors exist

Estimated tax is a pay as you go system. The IRS expects you to pay tax on income as you earn it, in four installments, and charges an underpayment penalty if you fall short. The penalty is calculated like interest, currently at the federal short term rate plus three points, on the shortfall for each quarter.

The problem is that you cannot know your final tax until the year is over, so the rules give you two ways to be safe regardless of how the year ends. Pay in at least 90 percent of the current year's tax, or pay in at least 100 percent of the prior year's tax. Hit either and there is no penalty, whatever the actual liability turns out to be.

Why the prior year test is usually the one that matters

Of the two, the prior year test is the one most self-employed people actually use, for a simple reason. It is a fixed number you know in January. Last year's total tax is on line 24 of last year's 1040. Divide by four and you have your quarterly payment, and it cannot be invalidated by anything that happens during the year.

The 90 percent test, by contrast, is a moving target. It depends on this year's income, which you do not know until December. A strong fourth quarter can retroactively make your first three payments insufficient. That is the risk the prior year test removes.

The 150,000 dollar switch

Here is the wrinkle. If your adjusted gross income on the prior year return was more than 150,000 dollars, or 75,000 if married filing separately, the prior year test requires 110 percent of last year's tax rather than 100 percent. The rule is in section 6654(d)(1)(C).

So a filer with 140,000 dollars of prior year AGI and 30,000 dollars of prior year tax needs to pay in 30,000 to be safe. A filer with 160,000 dollars of prior year AGI and the same 30,000 of tax needs to pay in 33,000. Same tax, 3,000 dollars more required, because of where AGI landed.

The 150,000 dollar threshold is not indexed for inflation. It was set in 1994 and it has been 150,000 ever since. In 1994 that was a high income. Today it catches a large share of established self-employed professionals, most of whom have no idea the rule exists until their preparer mentions it or a penalty notice arrives.

Which test wins

You avoid the penalty by meeting the lower of the two targets. So the question is always which one is smaller: 90 percent of this year's projected tax, or 100 or 110 percent of last year's tax.

For a business that is growing, the prior year test usually wins even at 110 percent. If last year's tax was 30,000 and this year's is projected at 45,000, then 90 percent of this year is 40,500 and 110 percent of last year is 33,000. The prior year test is lower by 7,500 dollars, and it is certain. You pay 33,000, owe the remaining 12,000 at filing, and pay no penalty.

For a business that is shrinking, the current year test wins. If last year's tax was 45,000 and this year's is projected at 30,000, then 110 percent of last year is 49,500 and 90 percent of this year is 27,000. Paying 49,500 would be absurd. You pay 27,000 and rely on the current year test, accepting that you need to keep the projection accurate through the year.

Withholding counts, and it counts favorably

If you or a spouse have a W-2 job, the tax withheld from that paycheck counts toward the safe harbor. Subtract it from the required annual amount and split what remains across the four quarters.

Withholding has one special property that estimated payments do not. It is treated as paid evenly through the year regardless of when it was actually withheld. That means increasing withholding in December can cure an underpayment from the first quarter, which an estimated payment made in December cannot do. For a self-employed person with a W-2 spouse, adjusting the spouse's withholding late in the year is a legitimate way to fix a shortfall.

The de minimis exception

There is a floor below which none of this matters. If the tax you owe at filing, after withholding and estimated payments, is less than 1,000 dollars, there is no underpayment penalty regardless of whether you met either safe harbor. The rule is in section 6654(e)(1).

This mostly helps people with small side businesses or first year businesses, where the total liability is modest. It is not a reason to skip estimated payments if you expect to owe more than 1,000.

The four dates

Estimated payments are due April 15, June 15, September 15, and January 15 of the following year. The periods they cover are not equal quarters. The first covers January through March, the second April and May, the third June through August, and the fourth September through December. The June payment covers only two months of income, which surprises people every year.

If a due date falls on a weekend or holiday, it moves to the next business day. In 2026 all four fall on weekdays, so the dates above are the dates.

How ExactSplit handles it

ExactSplit computes both tests. It projects the current year's tax from your year to date transactions, takes 90 percent of that, and compares it to 100 or 110 percent of last year's tax depending on last year's AGI. It picks the lower target, subtracts withholding, splits by four, and explains in plain language which test won and why.

Enter last year's total tax and AGI in settings and the 110 percent switch is handled automatically. Leave them blank and it falls back to the 90 percent test alone, with a note that adding last year's return usually lowers the required payment. The de minimis exception is checked as well, and if your expected balance due is under 1,000 dollars the dashboard says so.