Nothing paid until December on a $40,000 side business cost a $10 penalty, because last year's tax set the bar

A single filer with a $65,000 salary and a new $40,000 side business owed $17,941 of federal tax for 2025 and paid no estimated tax until December 15, when she sent $386. Her underpayment penalty came to $10. The reason is one clause of IRC §6654(d): what she had to prepay was capped at last year's tax, $6,141, and her paycheck withholding had already covered all but $386 of it.

Every figure below comes from the Form 2210 module in TaxMath's Form 1040 calculator, run with its 2025 rule set, which is marked official. Tax year 2025 is the return filed in 2026, and it is the last year whose penalty the engine can price end to end. The filer's employer withheld $5,755 of federal income tax across 2025, which is what the engine says her wages alone would owe. Her side business earned its profit evenly through the year. Her 2024 return, wages only, showed $6,141 of tax on $65,000 of adjusted gross income.

The four rules that decide whether there is a penalty at all

Section 6654 charges interest on estimated tax that was not paid on time, and four rules decide how much had to be paid, and when, before any interest runs.

The first is a $1,000 floor. No penalty applies if the tax on the return, minus withholding, is under $1,000 (§6654(e)(1)). The 2025 Form 2210 instructions put it as "the total tax shown on your 2025 return minus the amount of tax you paid through withholding is less than $1,000." Our filer's $17,941 less $5,755 leaves $12,186, so the floor does not help her.

The second is the 90% rule: paying 90% of the current year's tax on schedule is always enough (§6654(d)(1)(B)(i)).

The third is the 100% rule: paying 100% of the tax shown on last year's return is also enough, if last year was a 12-month year and a return was filed for it (§6654(d)(1)(B)(ii)). The requirement is whichever of the two is smaller, so a filer whose income jumps can prepay last year's number and leave the whole increase for April.

The fourth adjusts the third. When last year's adjusted gross income exceeded $150,000, the prior-year figure becomes 110% of last year's tax (§6654(d)(1)(C)). The threshold is $75,000 for a married person filing separately. The statute writes it as a flat $150,000, and the 2026 Form 1040-ES applies the same figure to 2025 AGI.

A fifth exception applies only to a filer with no tax liability at all for a full 12-month prior year (§6654(e)(2)). Her $6,141 rules it out.

Part I of Form 2210: what she had to prepay

Line 4 is the whole return, not only the business. It adds her $12,289 of income tax to the $5,652 of self-employment tax that $40,000 of profit produces with a $65,000 W-2 beside it (worked line by line here). The income tax is on $78,989 of taxable income: $105,000 of wages and profit, less the $2,826 half of self-employment tax, less the $15,750 standard deduction, less a $7,435 qualified business income deduction.

Line 9 is where the side business disappears from the requirement. Last year's $6,141 was smaller than 90% of this year's tax by $10,006, so $6,141 is all the statute asked her to have paid by January 15, 2026.

Part III: how $386 short became an $18 penalty

Section 6654(c) splits the required payment into four equal installments due April 15, June 15 and September 15 of the tax year and January 15 of the next. Here each one is $6,141 ÷ 4 = $1,535.25.

Withholding counts differently from an estimated payment. Under §6654(g)(1), tax withheld from wages is treated as paid in equal parts on each due date, whatever paycheck it came out of. So her $5,755 counts as $1,438.75 on each of the four dates, and each installment arrives $96.50 short.

The form does not let a shortfall sit in its own quarter. Each payment goes first to the oldest unpaid installment (Form 2210 instructions), so June's withholding pays off April's $96.50 before it touches June, and the gap rolls forward and grows:

The interest column is the shortfall × days ÷ 365 × 7%. That 7% is the rate the 2025 penalty worksheet applies in all four of its rate periods, from April 16, 2025 through April 15, 2026 (instructions). It is the §6621 underpayment rate, the federal short-term rate plus 3 percentage points, reset each quarter. The last shortfall stops accruing on April 15, 2026, the 15th day of the fourth month after the year ends (§6654(b)(2)). With nothing paid but withholding, the four rows add to $17.97, and line 19 is $18.

What the December payment did

On December 15, 2025 she paid $386. The penalty worksheet counts days "to the date the amount on line 1a was paid," so the payment stopped the oldest open shortfall that day. September's $289.50 accrued for 91 days instead of 122, which is $5.05 instead of $6.77. The remaining $96.50 sat in hand until January 15 and, with that date's $1,438.75 of withholding, covered the fourth installment exactly.

The penalty fell to $1.13 + $3.41 + $5.05 = $9.59, or $10. The calculator takes estimated payments by quarter and credits a fourth-quarter payment on January 15, so entering this $386 in its fourth box shows $11, the figure for paying on the due date itself.

A December raise in withholding would have done better than either. Had she filed a new W-4 and had $386 more withheld from her last paycheck, §6654(g)(1) would spread it across the year like the rest: $6,141 ÷ 4 = $1,535.25 credited on every due date, no installment short, and a penalty of $0. The 1040-ES names the W-4 as a way to avoid estimated payments on other income. The same $386 leaves her account in both cases, and the April balance due is $11,800 either way. The difference is only in which dates the law says it arrived.

What the prior-year rule was worth

Measured against line 5 instead of line 8, the same filer would have needed $16,147 by January 15, or $4,036.75 per installment, and her withholding would have left $10,392 unpaid. That is the position of anyone who cannot use the prior-year rule: §6654(d)(1)(B) withdraws it when last year was shorter than 12 months or no return was filed for it.

The December payment in the right-hand column is $10,392, and it still leaves $258. A catch-up payment stops interest from the day it lands. It does not reach back to April, June or September, which is why the penalty is figured "separately for each installment due date" and can be owed "even if you're due a refund" (instructions).

The engine figures the regular method only. A filer whose profit arrived late in the year can file Schedule AI, the annualized income installment method, which the instructions say may reduce or eliminate the penalty. Our filer earned evenly, so it would not change her numbers. A filer who checks none of the boxes in Part II of Form 2210 can leave the penalty line blank, and the instructions say the IRS will figure the penalty and send a bill.

The same filer in 2026: the bar moves up

The rule that protected her in 2025 stops helping in 2026, because last year's tax now includes the side business. With the same wages, the same withholding and the same $40,000 of profit, the engine's 2026 rule set gives:

• Current-year tax: $17,662. The standard deduction rises to $16,100, and taxable income falls to $78,639.
• 90% of that: $15,896.
• 100% of 2025 tax: $17,941. Her 2025 AGI was $102,174, under $150,000, so the 110% rule does not apply.
• Required annual payment: $15,896, the smaller, or $3,974 per installment.

Withholding still counts as $1,438.75 per installment, so each of the four needed $2,535.25 of estimated tax: April 15, June 15 and September 15, 2026, and January 15, 2027 (Form 1040-ES). By November 5, 2026, three of those dates have passed. If she has paid nothing for 2026, each $2,535.25 is accruing from its own due date, and a payment now stops the oldest one first.

The 1040-ES offers one way to skip the last installment: it says the January 15 payment is not required if the 2026 return is filed by February 1, 2027 and the balance is paid in full; §6654(h) writes that date as January 31, which falls on a Sunday in 2027. That rule removes the penalty on the fourth installment only.

The engine computes every line of the 2026 Form 2210 above, and it refuses the penalty itself. A 2026 shortfall accrues until April 15, 2027, and the §6621 rate is set one quarter at a time, so when this was written in October 2026 the rates for the quarters running up to that date had not all been announced. Rather than accrue nothing across the unpriced months and print a figure that is too small, the engine marks the line not yet supported until the IRS sets them.

The W-4 route is narrower for 2026 than it was for 2025. Making up $10,141 through withholding in November and December would take nearly all of two months' gross pay on a $65,000 salary, which is $10,833.

California splits the year differently

California's Franchise Tax Board uses the same 90%, 100% and 110% tests, with the 110% threshold at $150,000 of prior-year California AGI, but it does not divide the payment into equal quarters. For 2026 it asks for 30% by April 15, 40% by June 15, nothing on September 15, and 30% by January 15, 2027 (FTB). Its floor is $500 owed, half the federal $1,000. And a filer whose current-year California AGI reaches $1,000,000 ($500,000 married filing separately) loses the prior-year option entirely and must pay on 90% of the current year's tax.

A Californian in our filer's position would have needed 70% of her state requirement in by June 15, where the federal schedule asks for half. To check your own federal number, enter last year's tax and AGI, your withholding and any quarterly payments in the Form 1040 calculator and read Form 2210 line 9. For our filer that line reads $15,896 for 2026, and $10,141 of it has to come from estimated tax, with the last $2,535.25 installment due Friday, January 15, 2027.

This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.