The Estimated Tax Safe Harbor: A September Checklist for Business Owners
The estimated tax safe harbor protects a client from the underpayment penalty if withholding and timely estimates cover the smaller of 90 percent of the 2026 tax or 100 percent of the 2025 tax, rising to 110 percent of the 2025 tax when 2025 AGI was over $150,000. For business owners with rising income, the prior-year number does most of the work. September is the right time to check it, because the third 2026 installment is due September 15, 2026, and the penalty is figured one period at a time.
Key Takeaways: Checking the Estimated Tax Safe Harbor in September
- The 2026 rules come from Publication 505 (2026). The 110 percent version applies when 2025 AGI exceeded $150,000 ($75,000 married filing separately).
- The prior-year figure is fixed once the 2025 return is filed. No projection required.
- The safe harbor removes the penalty. It does not reduce the tax. Whatever the client still owes is due with the return.
- The penalty is figured separately for each payment period, so a shortfall paid now stops growing now.
- Clients with back-loaded income should look at the annualized income installment method before they overpay the early installments.
What Does the Estimated Tax Safe Harbor Require for 2026?
In most cases, a client must pay 2026 estimated tax if both conditions in Publication 505 (2026) apply:
"1. You expect to owe at least $1,000 in tax for 2026 after subtracting your withholding and tax credits. 2. You expect your withholding and tax credits to be less than the smaller of: a. 90% of the tax to be shown on your 2026 tax return, or b. 100% of the tax shown on your 2025 tax return."
Pub 505 adds a condition that is easy to miss: "Your 2025 tax return must cover all 12 months."
The 100 percent figure is not the number for most of my business-owner clients. Pub 505 raises it to 110 percent "if less than two-thirds of your gross income for 2025 or 2026 is from farming or fishing and your 2025 adjusted gross income was more than $150,000 ($75,000 if your filing status for 2026 is married filing a separate return)." A good year for a sole proprietor or an S corporation owner clears that line easily.
The 2026 due dates follow the Pub 505 table:
| Payment period | Due date |
|---|---|
| January 1 to March 31 | April 15, 2026 |
| April 1 to May 31 | June 15, 2026 |
| June 1 to August 31 | September 15, 2026 |
| September 1 to December 31 | January 15, 2027 |
Farmers and fishermen are the exception. If at least two-thirds of gross income for 2025 or 2026 comes from farming or fishing, Pub 505 gives one due date for 2026: January 15, 2027.
Why Is the Prior-Year Method the Workhorse When Income Is Rising?
The prior-year method works because the number is already known. Once the 2025 return is filed, 110 percent of the 2025 tax is a fixed figure.
The 90 percent alternative needs a projection of 2026 tax, and a business owner's projection in April is a guess. If the year runs hot, the 90 percent target moves up with it. The client who aimed at 90 percent of a $70,000 projection is short when the real number turns out to be $95,000.
The rule takes whichever figure is smaller. When income jumps, that is usually the prior-year figure. With modest growth, 90 percent of the current year can come in lower (against a $68,200 prior-year figure, 90 percent of a $70,000 year is $63,000), but only an accurate projection tells you so. The prior-year figure is the one you can rely on without one.
I repeat this to every client: the safe harbor protects against the penalty, not the tax. A client who pays exactly 110 percent of last year's tax during a much bigger year still owes the difference in April 2027. Pub 505 says it from the other direction: "you may be charged a penalty even if you are due a refund when you file your tax return."
How Does a September Catch-Up Work? An Illustrative Example
These figures are illustrative only. A married client files jointly, runs a consulting business through a single-member LLC, and has no withholding.
- 2025 total tax: $62,000
- 2025 AGI: $310,000
- Projected 2026 tax: $95,000
Because 2025 AGI was over $150,000, the prior-year target is 110 percent: $62,000 × 1.10 = $68,200. The current-year target is $95,000 × 0.90 = $85,500. The required annual payment is the smaller, $68,200, or $17,050 a quarter.
In April, the client paid $15,500, which is 100 percent of the 2025 tax divided by four. He paid the same in June. Each of those installments is $1,550 short, $3,100 in total.
Pub 505's Amended Estimated Tax Worksheet (Worksheet 2-12) handles the September refigure. Line 2 multiplies the amended total "by: [...] 75% (0.75) if next payment is due September 15, 2026," and line 4 subtracts the payments already made:
- Line 1, amended total estimated tax due: $68,200
- Line 2, $68,200 × 0.75: $51,150
- Line 3, payments for previous periods: $31,000
- Line 4, next required payment: $20,150
The January 15, 2027 payment is then $68,200 minus $51,150, which is $17,050. The total paid for the year is $68,200.
The client still owes $95,000 minus $68,200, or $26,800, with the 2026 return.
How Is the Underpayment Penalty Figured?
Pub 505 answers in one sentence: "The penalty is figured separately for each payment period."
Treas. Reg. § 1.6654-1 gives the mechanics. The addition to tax applies to "the underpayment of any installment of estimated tax for the period from the date such installment is required to be paid until the 15th day of the fourth month following the close of the taxable year, or the date such underpayment is paid, whichever is earlier." For a calendar-year 2026 client, that outside date is April 15, 2027.
The same regulation treats a payment made on an installment date, to the extent it exceeds that installment, as "a payment of any previous underpayment." In the example, the September payment of $20,150 is $3,100 more than the $17,050 installment. That $3,100 covers the April and June shortfalls, and they stop accruing on September 15.
That is the case for acting in September. The April and June shortfalls still cost something for the months they sat unpaid. Pub 505 warns that a client who refigures after an income increase "may be charged a penalty for underpayment of estimated tax for the period(s) before you changed your payments." But each shortfall stops growing on the date it is paid, so paying on September 15, or soon after, caps the exposure instead of letting it run to April 2027.
The rate comes from Section 6621. Rev. Rul. 2026-15 sets the underpayment rate at 7 percent for the calendar quarter beginning October 1, 2026, and states that "the 7 percent rate also applies to estimated tax underpayments for the fourth calendar quarter beginning October 1, 2026." The rate is set quarterly, so confirm it for any other quarter before you quote it.
The penalty does not compound. Interest under the Code is generally compounded daily, but Treas. Reg. § 301.6622-1(b) says the daily compounding rule "shall not apply for purposes of determining the amount of any addition to tax under sections 6654 or 6655." The individual penalty sits in Section 6654. C corporations work under a separate regime in Section 6655, which this post does not cover.
When Should You Use the Annualized Income Installment Method?
Use it when the income arrives late in the year. Pub 505 says, "If you don't receive your income evenly throughout the year, your required estimated tax payments may not be the same for each period."
The method "annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period." Pub 505's own example is a repair shop whose income "is much larger in the summer than it is during the rest of the year." For the September 15 installment, the period ends August 31, so the calculation looks at January 1 through August 31.
For the clients I see, this fits a business sold in the fall, a seasonal operation, or a pass-through owner whose income is booked late. It can also help the client in the example if the first half of the year was light. Pub 505 points to "Schedule AI-Annualized Income Installment Method in the Instructions for Form 2210." Because the annualized payment "for one or more periods may be less than the amount figured using the regular installment method," a light first half may shrink or remove the April and June shortfalls.
The cost is documentation: income and deductions by period, not just a year-end total, and Form 2210 filed with the return.
The September Checklist
- Pull the 2025 return. Confirm total tax, AGI, and that the return covered 12 months.
- Apply the $150,000 AGI test ($75,000 married filing separately) and set the target at 100 or 110 percent.
- Compare the target with 90 percent of a current 2026 projection. Use the smaller.
- Total the April and June payments, plus any withholding and credits, against the required amount through June 15.
- Run Worksheet 2-12 and set the September 15 payment. Put any catch-up in that payment.
- Flag clients with late or seasonal income for the annualized method.
- Tell each client the expected balance due in April 2027.
Clients whose entities elected a pass-through entity tax have a second set of estimates. My post on New York PTET elections covers the separate quarterly PTET payments. For the projection itself, the Section 199A walkthrough covers the QBI piece.
FAQ
Does the estimated tax safe harbor reduce what my client owes? No. It protects against the underpayment penalty only. Any tax above the safe-harbor payments is due with the return.
If my client missed the June target, is it too late? No. The penalty is figured separately for each payment period, and an underpayment stops accruing when it is paid. A catch-up in the September 15 installment limits the cost.
September is the last clean chance to fix the year before January. Most of my own checks start with a primary-source question, and I built Tax Orator to answer those with the citation attached.