Every spring, one question dominates conversations between taxpayers and their accountants: “How much do I actually have to pay the IRS right now?” In an ideal scenario, the IRS expects 90% of your total tax bill to be paid in equal portions throughout the year. But for many people, that’s easier said than done.
Unpredictable income — from year-end bonuses, business profits, or a fluctuating stock market — makes it difficult to hit that 90% target consistently. Fall short, and you could be looking at underpayment penalties. The good news is that the tax code includes several legal strategies and “safe harbors” to help you stay in the clear. Here’s a look at five approaches for managing your 2026 tax obligations.
Strategy 1: Use Year-End Withholding to Your Advantage
One of the lesser-known advantages in the tax code is how withholding is treated differently from estimated tax payments. While estimated payments are credited on the date they’re mailed, withholding is considered to have been paid evenly across the entire year — no matter when it actually occurred.
So if you find yourself underpaid come November, you can’t simply send a large estimated payment to make up for earlier shortfalls — those quarterly penalties are already set. But you can increase withholding on your final December paychecks, or take a distribution from an IRA with 100% federal withholding. Because the IRS spreads that December withholding across the whole year, it can wipe out underpayment penalties retroactively.
Strategy 2: Base Payments on Last Year’s Tax Bill
For those who want guaranteed protection from penalties — regardless of what they earn this year — looking at last year’s return is the most reliable approach, and it’s especially popular among high earners.
If your adjusted gross income was $150,000 or less in 2025, paying 100% of last year’s total tax will keep you penalty-free. If your AGI exceeded $150,000, you’ll need to pay 110% of your 2025 tax liability. Even if you sell a business for $10 million in 2026, you won’t owe any penalties in April 2027 as long as you’ve met that 110% benchmark through equal quarterly payments.
Strategy 3: Annualize Your Income for Seasonal Earnings
If your income arrives in waves — say, you’re a consultant paid mostly in the fourth quarter, or you plan to sell a concentrated stock position during the summer — making equal payments in April and June can feel both unfair and financially painful.
The annualized income installment method offers a solution. It requires completing a “mini tax return” calculation each quarter based on what you’ve actually earned so far. This allows you to pay very little early in the year when income is low, then catch up as larger payments come in. It involves more paperwork, but it lets you hold onto your cash longer.
Strategy 4: Treat the Penalty as a Business Decision
Sometimes the most financially logical move is simply to wait until April. IRS underpayment penalties aren’t criminal fines — they function more like an interest charge for using government funds.
As of early 2026, the federal underpayment rate sits at around 7%. If you have an investment opportunity or a high-yield account where your money can earn a significantly greater return, intentionally underpaying and absorbing the penalty cost in April could make financial sense. For some taxpayers, the liquidity alone is worth it.
Strategy 5: Combine Methods for Maximum Benefit
Many experienced investors blend these approaches. They make quarterly payments that meet the 110% safe harbor threshold — guaranteeing no penalties — while keeping the remaining tax they know they’ll eventually owe in a high-yield savings account or short-term Treasury securities until April 15.
The result: no penalties, straightforward equal payments, and interest earned on the balance in the meantime.
Whether you prefer the simplicity of the 110% safe harbor, the precision of annualizing your income, or a last-minute withholding adjustment, there are real options available to taxpayers with unpredictable incomes. Just keep in mind that your state may operate under different rules than the federal government.
This article was provided to The Associated Press by Morningstar. Sheryl Rowling, CPA, is an editorial director and financial adviser for Morningstar.
