I have not worked for the first half of this year and have some modest dividend/interest income that would end up being less than $1000 in taxes by the end of the year, so I have not been paying any estimated taxes on that income. However, I recently started a new job as an independent contractor where I will be making enough money to put my tax liability over $1000 by the end of the year.

As far as I'm able to tell, it seems like the safe harbor for underpaying estimated taxes only applies to "withholding and refundable credits" and not on-time estimated tax payments?

So essentially, by starting this job, it seems like I now will owe an underpayment penalty for the first 2 estimated tax payments (dividends only) even if I use the Annualized Income Installment Method and pay all future quarterly taxes on time?

I guess my overall question is why don't on-time estimated tax payments also count towards the 90% safe harbor limit or the < $1000 in taxes owed in order to not have to pay a late payment penalty? Or am I misunderstanding something here?

Is the only way around this to just pay the estimated taxes on time even if you expect your total tax liability to be under $1000 for the year?

  • I've added a united-states tag based on the context of your question - tax questions need a jurisdiction and this is a global site. If this is wrong please edit or comment.
    – Vicky
    Commented Jul 22, 2023 at 15:01
  • Are you required to make estimated tax payments? My understanding is estimated tax payments are optional unless you underwithheld by too much in the past.
    – Teepeemm
    Commented Jul 22, 2023 at 16:51
  • From IRS publication 505: In most cases, you must pay estimated tax for 2023 if both of the following apply. You expect to owe at least $1,000 in tax for 2023 after subtracting your withholding and tax credits. You expect your withholding and tax credits to be less than the smaller of: a. 90% of the tax to be shown on your 2023 tax return, or b. 100% of the tax shown on your 2022 tax return. Your 2022 tax return must cover all 12 months.
    – Andrew
    Commented Jul 23, 2023 at 0:40

1 Answer 1


Update: I see what you're saying. You're saying that the tax based on annualized income in the first two quarters was more than $0 but less than $1000, but you you didn't pay 90% of the appropriate fraction based on quarter of that tax in the first two quarters. You were expecting to be able to use the "less than $1000" rule to not have to pay the penalty despite having paid no withholding or estimated taxes. But the "less than $1000" rule does not apply in the Annualized Income Installment Method or to estimated tax payments in general. I believe you are correct, that you will have a small underpayment penalty in the first two quarters. The "less than $1000" rule is not described as a "safe harbor" but rather an "exception to penalty". So I guess you cannot rely on the "less than $1000" rule if you want to be guaranteed to avoid the underpayment penalty. The only sure way to avoid the penalty with uncertain future income, is to either pay based on 100% or 110% of last year's income, or pay based on 90% of the annualized income based on the current year quarters so far.

If you pay the correct amount of estimated taxes for the last 2 quarters under the Annualized Income Installment Method, you will not have an underpayment penalty. You will have to elect to use the Annualized Income Installment Method and include Form 2210 when you file your taxes.

The underpayment penalty is calculated on Form 2210. The safe harbor (100% or 110% of last year's tax, or 90% of this year's tax) is on line 9. The withholding (which for you is 0) is on line 6. Line 9 is more than line 6 so you will proceed to Parts II and III. You will check box C (Annualized Income Installment Method) in Part II.

You will fill out Schedule AI for the Annualized Income Installment Method. For the first 2 quarters, you have not much income from the first 2 quarters, so you would not have any tax on that, and you would not be expected to have paid any estimated tax in the first 2 quarters. Then, you will take the income from the first 3 quarters (which consists of just the 3rd quarter for you), divide by 8/12, calculate the tax on that, and you would be expected to have paid 90% of that in the first 3 quarters (which is just 3rd quarter since you were not expected to pay anything in the first 2 quarters). Then you will take the income from the whole year, calculate the tax on that, and you would be expected to have paid that in all 4 quarters (the 4th quarter expected amount is just the total expected minus the amount expected in the first 3 quarters).

These amounts from Schedule AI would transfer onto Form 2210 line 10, and you will only have amounts in the 3rd and 4th quarter boxes. Your estimated taxes paid in each quarter will go in line 11. If line 11 is greater than line 10 for each quarter, then you have no underpayment penalty. (Or if you have more excess in the 3rd quarter that can be applied forward to the 4th quarter to cover the deficit there, you will calculate in the lines 12-18 that there is no underpayment penalty.)

  • It does seem like there will be an underpayment on Line 17 a and b since there was some small amount of income there with no estimated payments, however. So it seems like that penalty on Line 19 in of Section B will get copied over to my 1040?
    – Andrew
    Commented Jul 22, 2023 at 14:16
  • @Andrew: I think I see what you are saying. I updated the answer
    – user102008
    Commented Jul 23, 2023 at 15:26

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