You have been keeping the business moving, covering payroll, and making decisions with the cash available. Then your tax professional says your estimated payments may be short. Your first thought is practical: would it be easier to keep the money in the business and pay the penalty later?

That is a fair question, but the estimated tax penalty is only one part of the decision. What you owe depends on how much you underpaid and when. You may also have a way to address the shortfall before the year ends.

Through your LIFT – Legal, Insurance, Financial & Tax™ framework, I look at how that choice affects the business and the household it supports. The goal is a clearer decision while there is still time to act.

The Estimated Tax Penalty Starts With a Timing Question

Federal income tax is generally paid as you earn income, through withholding, estimated payments, or both. Paying everything when you file does not necessarily satisfy that requirement. You can owe an underpayment penalty even when you eventually pay the full tax.

For many individuals, avoiding the penalty generally means paying enough, on time, to cover the smaller of 90% of the current year’s tax or 100% of the prior year’s tax. The prior-year percentage becomes 110% if your prior-year adjusted gross income exceeded $150,000, or $75,000 if married filing separately. The prior-year route requires a return covering a full 12 months.

These benchmarks are often called a “safe harbor,” meaning a way to avoid this penalty even if more tax is due with your return. Special rules and exceptions apply, including for some people who owe less than $1,000 after withholding and applicable credits. Your tax professional should calculate which rule fits.

Consider a simplified annual-target example. Your prior-year tax was $40,000, your prior-year adjusted gross income was $200,000, and you expect this year’s tax to be $60,000. Assuming the higher-income rule applies, compare $44,000, or 110% of $40,000, with $54,000, or 90% of $60,000.

The smaller annual target is $44,000, not the full $60,000. But that does not establish whether payments were timely, and it does not erase the remaining tax. Your payment dates and withholding still need to be checked.

The bottom line: Ask what you needed to pay, and by when, before deciding how expensive a shortfall will be.

The Rate Is Not the Same as Your Actual Bill

The estimated tax penalty is calculated using an interest rate applied to each installment’s shortfall for the period it remains unpaid. It is not simply a flat percentage of the amount you owe when filing. An earlier shortfall can cost more than a later one.

For the fourth quarter of 2026, the federal individual underpayment rate is 7% annually. That rate is set quarterly, so a calculation spanning different quarters needs the applicable rates for those periods. Today’s rate is not a promise about next year.

For a simple illustration, a $10,000 shortfall outstanding for 90 days at a constant 7% annual rate produces about $173 using $10,000 × 7% × 90 ÷ 365. This is not a complete Form 2210 calculation. Your actual result depends on the installment amounts, dates, rates, and applicable rules.

If your income arrived unevenly, ask about the annualized income installment method. That calculation can account for when you actually earned income instead of treating it as evenly earned throughout the year. A strong final quarter should prompt a timing review, not an assumption that every earlier payment was wrong.

The bottom line: Have the shortfall calculated using your actual income and payment history, not just a headline percentage.

Keeping the Cash Has a Cost, Too

Once you know the likely penalty, compare it with a realistic plan for the money. Is it covering an essential expense, sitting in the operating account, or funding a project that may not pay off soon? “Keeping it in the business” needs a specific purpose and a repayment date.

For an individual, federal income tax underpayment penalties and personal income tax interest generally are not deductible. A 7% nondeductible cost is therefore not equivalent to 7% interest that genuinely qualifies for a deduction. The tax treatment changes the comparison.

Here is a hypothetical illustration, not a recommendation to borrow. If a financing cost were fully deductible and the applicable marginal tax rate were 42%, a 7% nondeductible cost would be comparable to about 12.1% before that deduction: 7% divided by 58%. That comparison only matters for borrowing that genuinely funds business spending. Your tax rate and the availability of a deduction cannot be assumed.

Interest on money borrowed to pay your personal income tax is generally treated as personal interest and is not deductible, even when the loan comes from a business credit line. Deductibility follows how the borrowed money is actually used, so have your tax professional evaluate the transaction, fees, and restrictions before assuming any deduction.

Also separate an estimated-payment shortfall from missing the filing or payment deadline. Paying the tax by the regular return deadline does not necessarily erase an earlier estimated tax penalty. Paying after that deadline can add interest and a failure-to-pay penalty.

Failing to file on time can add another, generally larger penalty. An extension to file generally does not extend the time to pay. If cash is tight, discuss payment options and file on time, or obtain a valid filing extension, rather than letting an unpaid balance become an unfiled return.

The bottom line: File on time, always, even when you cannot pay, then compare the full cost of how you fund the payment.

A Late-Year Paycheck May Give You Another Option

If you receive wages, ask your tax professional whether additional federal income tax withholding before December 31 could help. Under the usual federal rule, income tax withholding is treated as paid evenly across the installment dates, even when more was withheld late in the year. Different treatment can apply if actual withholding dates are used.

That can make additional withholding more useful than an estimated payment of the same amount made late in the year. A new estimated payment generally counts when paid; it does not automatically go back and repair an earlier shortfall. Additional withholding may reduce or eliminate the penalty if the numbers support it.

This is not a reason to invent wages, backdate payroll, or take money from employee payroll taxes. If you are a sole proprietor taking owner draws, those draws are not W-2 wages. Your business’s tax structure and actual compensation arrangements determine what options are available.

If you file jointly and your spouse receives wages, ask whether adjusting that withholding would help the household’s position. Any adjustment should account for the remaining paychecks and the cash your family needs. Get the amount and payroll cutoff confirmed before assuming it can be done.

The bottom line: Ask about withholding now, while remaining paychecks may still provide an option.

Make the Decision Work Across Your Business

A tax payment changes more than a number on a return. Before deciding how to address a shortfall, look at the four parts of the business together.

Legal

Confirm whether you are addressing your personal tax obligation or a separate entity’s obligation. Keep owner distributions, loans, wages, and business payments properly documented. Moving money between accounts does not change its legal or tax character by itself.

Insurance

Check upcoming premium commitments before using the cash reserve. A payment plan that leaves required coverage unfunded creates a different problem. If the reserve also supports deductibles or business interruption needs, include that purpose in the cash-flow discussion.

Financial

Build a short cash forecast covering tax payments, payroll, essential bills, and household needs. Consider your TEAM: Time, Energy, Attention, and Money. Decide which person owns the next step and when it must happen, rather than leaving the calculation in an unanswered email.

Tax

Have your tax professional compare the payment benchmarks, actual installments, and remaining withholding opportunities. Ask whether uneven income or another exception changes the calculation. Check state requirements separately; this article addresses federal individual income tax, not every business tax.

The bottom line: A useful tax decision protects the business and household while giving each advisor a clear question to answer.

LIFT Business Breakthrough™ Session: What You Can Do Right Now

Gather last year’s return, this year’s estimated payment dates and amounts, and your latest payroll withholding information. Bring those to a planning conversation before year-end.

As a Personal Family Lawyer firm and LIFTed Business Advisor, I help you connect the legal structure with the financial decisions supporting your business. Tax preparation reports what happened; planning helps you decide what happens next, with the right professionals addressing their parts.

This article is a service of Ganvir Law, a Personal Family Lawyer firm and LIFTed Business Advisor. I offer a complete spectrum of legal services for businesses and can help you make wise choices for your business throughout life and in the event of your death. I also offer a LIFT Business Breakthrough Session, which includes a review of the legal, insurance, financial, and tax systems supporting your business. Call our office today to schedule.

The content is sourced from Personal Family Lawyer for use by Personal Family Lawyer firms, a source believed to be providing accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.