Most people find out they underpaid their taxes in April, when the return shows a balance due and a line for an underpayment penalty. The penalty is not for owing money at filing time. It is for not paying enough during the year, and the IRS measures that quarter by quarter. The good news is that the rules include a safe harbor, and in most years a short year can still be fixed in November and December.
Here is how the penalty works, how the safe harbor protects you, and the year-end moves that still count.
Why the penalty happens
The tax system is pay-as-you-go. Employees pay through withholding, and everyone else pays through quarterly estimated payments. If you have income with no withholding, or withholding that is too low for your bracket, you can fall behind during the year. The common causes we see:
- RSU vests and bonuses. Employers usually withhold federal tax on supplemental wages at a flat 22% (37% on the portion over $1 million in a year). If your top bracket is 32%, 35% or 37%, every vest leaves a gap.
- Stock and property sales. A large capital gain from selling shares, a rental property or a business interest has no withholding at all.
- Two incomes. Each employer withholds as if its paycheck were the household's only income, so a two-earner couple is often under-withheld.
- Rental, interest and side income. None of it has withholding unless you arrange it.
Generally, if you owe less than $1,000 after withholding and credits, there is no penalty. Above that, the IRS checks whether you paid enough by each installment date.
The safe harbor
You avoid the penalty if your withholding and timely estimated payments add up to at least the smaller of:
- 90% of this year's tax, or
- 100% of last year's tax, which rises to 110% if last year's adjusted gross income was over $150,000 ($75,000 if married filing separately).
The prior-year test is the useful one in a big year, because you already know the number: it is the total tax on last year's return. Pay 100% or 110% of it on time and you owe no penalty, even if this year's tax turns out much higher. You still owe the balance in April, but without the penalty on top.
The required amount is due in four equal installments. For 2026, the dates were April 15, June 15 and September 15, 2026, and the last one is January 15, 2027.
Why December withholding beats a January estimate
This is the rule that makes a year-end fix possible. Withholding is treated as paid evenly across the year, no matter when it actually came out of your pay. An extra $20,000 withheld from your last paycheck in December counts as $5,000 paid toward each of the four quarters, so it fills the gaps in April, June and September after the fact.
An estimated payment only counts from the day you make it. A payment on January 15 covers the fourth installment but does nothing for the first three. If you fell behind early in the year, a January estimate leaves part of the penalty in place, while extra December withholding can erase it.
An illustration
Suppose a married couple's total tax last year was $60,000 and their adjusted gross income was over $150,000, so their safe harbor is 110%, or $66,000. This year a large RSU vest pushes their projected tax to $95,000. Through November their combined withholding is $48,000.
- The gap: they need $66,000 paid for the year, or $16,500 per quarter. Their $48,000 of withholding counts as $12,000 per quarter, so each quarter is short.
- The fix: raise withholding by $18,000 before December 31, for example on the final paychecks or a December vest. Total withholding becomes $66,000, treated as $16,500 per quarter, and the penalty is gone.
- What is left: they still owe about $29,000 when they file, which is expected. The safe harbor prevents the penalty, not the tax.
If they had sent the same $18,000 as a January 15 estimate instead, the first three quarters would still show shortfalls and part of the penalty would remain.
Year-end moves that still work
- Run a projection now. You need two numbers: last year's total tax and this year's projected tax. Without them, you are guessing at the safe harbor.
- Raise withholding on the last paychecks. File a new Form W-4 with an extra dollar amount per pay period, or ask payroll for a one-time additional amount. Do it early in December so payroll can process it in time.
- Use a December vest or bonus. Some employers let you choose a higher withholding rate on supplemental pay. Our article on RSUs and ISOs covers the 22% gap in detail.
- Withholding from a retirement distribution counts too. If you are already taking a distribution from an IRA this year, federal withholding on it is treated as paid evenly through the year, the same as wage withholding.
- If income came late in the year, look at the annualized method. When most of your income arrived in the fourth quarter, for example a sale in November, Form 2210 Schedule AI can lower or remove the penalty for the earlier quarters. It takes more work, but it matches the required payments to when you actually earned the income.
- Check your state. Most states have their own estimated-tax rules and penalties, and they do not always match the federal safe harbor.
How we approach it
Every planning client gets a year-end projection before December 31. We compare your withholding and payments to date against both safe-harbor tests, show the shortfall by quarter, and give you a specific number to add, along with where to add it: payroll, a December vest, or an estimated payment. For clients with equity compensation, we map the vest calendar so the gap is handled before it opens; our Stock Options & Equity Compensation page and our article on selling ESPP shares cover those lanes. For real estate investors with a sale this year, see our Real Estate page. Current brackets and thresholds are on our 2026 Tax Rates page. We work with clients in every state by video.
Start with a complimentary tax projection
New clients start with a complimentary tax projection and a short conversation with one of our tax planning specialists, who will check your year against the safe harbor and tell you exactly what to pay, and when, before December 31. Book a consultation on our Contact page.
This article is general information about federal tax rules as of 2026. It is not tax advice for your situation; the right answer depends on your facts, your state and your full return.