As a certified public accountant, the most common question I hear in the spring is, 鈥淗ow much do I actually have to pay the IRS right now?鈥� In a perfect world, the IRS wants 90% of your total tax liability paid 鈥渞atably鈥� (equally) throughout the year.
The problem? Most successful people don鈥檛 have perfectly predictable incomes. Whether it鈥檚 a year-end bonus, a business windfall, or a volatile stock market, hitting that 90% target is like trying to pin a tail on a moving donkey. If you miss, you face underpayment penalties.
Fortunately, the tax code provides several 鈥渟afe harbors鈥� and strategic maneuvers.
1. The December miracle: late-year withholding
One of the most powerful 鈥渉acks鈥� in the tax code involves the definition of withholding. Unlike estimated tax payments (which are credited on the day you mail the check), withholding is treated as being paid equally throughout the entire year,鈥痳egardless of when it actually happens.
The Strategy: If you realize in November that you鈥檙e underpaid, you can鈥檛 simply mail a massive, estimated tax payment to erase previous quarterly shortfalls鈥攖he penalty for the early quarters is already locked in. However, you can ramp up your withholding on your final December paychecks or take a 鈥渢ax only鈥� IRA distribution鈥痺ith 100% federal withholding.
The Benefit: Because the IRS treats that December withholding as if it were paid throughout the year, it can retroactively eliminate underpayment penalties for the entire year.
2. The 鈥楻earview Mirror鈥� safe harbor
If you want to be 鈥渂ulletproof鈥� against penalties regardless of how much you earn this year, look at last year鈥檚 tax return. This is the most common strategy for high-income earners.
The Strategy: Pay in an amount based on your 2025 total tax. If your adjusted gross income is $150,000 or less, pay 100% of last year鈥檚 tax. If your AGI is over $150,000, you must pay 110% of last year鈥檚 tax.
The Benefit: Even if you sell a business for a $10 million profit in 2026, you will not owe any penalties in April 2027 as long as you hit that 110% of the 2025 benchmark through equal quarterly installments.
3. The 鈥楶ay-As-You-Go鈥� (annualized) method
If your income is seasonal鈥攆or example, you鈥檙e a consultant who gets paid in the fourth quarter, or you have a concentrated stock position you plan to sell in the summer鈥攑aying equal amounts in April and June feels unfair and creates a cash flow crunch.
The Strategy: Use the annualized income installment method. This requires performing a 鈥渕ini tax return鈥� calculation every quarter based on what you have actually earned to date.
The Benefit: It allows you to pay very little in the early quarters when income is low and only 鈥渃atch up鈥� when the big checks actually arrive. It鈥檚 more paperwork, but it keeps your cash in your pocket longer.
4. The 鈥楽trategic Penalty鈥� approach
Sometimes, the most mathematical move is simply not to pay until April. The IRS underpayment penalty isn鈥檛 a criminal fine; it鈥檚 essentially an interest charge for using the government鈥檚 money.
The Strategy: If you have an investment opportunity or a high-yield environment where your money can earn more than the IRS interest rate, you might choose to underpay intentionally.
The Benefit: As of early 2026, the federal underpayment rate is hovering around 7%. If you are confident you can net a significantly higher return elsewhere, or if you simply value the liquidity, paying the interest in April might be a calculated business decision.
5. The hybrid strategy: minimums plus catch-up
Many savvy investors combine these methods. They set their quarterly payments to exactly meet the 110% safe harbor鈥�(strategy No. 2) to guarantee no penalties, and then they hold the 鈥渆xcess鈥� tax they know they will eventually owe in a high-yield savings account or short-term Treasurys until April 15.
The Benefit: You get the security of no penalties, the simplicity of equal payments, and the interest bonus on the remaining balance.
You have options
Whether you prefer the set-it-and-forget-it 110% safe harbor, the surgical precision of annualizing your income, or the late-year withholding bailout, you don鈥檛 have to be a victim of an unpredictable income year. And remember that your state might have different rules.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to .
, CPA, is an editorial director, financial adviser for Morningstar.
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