Confused about "whichever is smaller" meaning in tax penalty rules
I'm having a really hard time wrapping my head around this tax penalty language from the IRS. It says: >Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller I'm totally confused by the "whichever is smaller" part. Does this mean in reverse: You pay a penalty if you owe more than $1,000 AND that $1,000 is more than 10% of your current year tax AND you haven't paid 100% of last year's tax? So hypothetically, if I paid 100% of last year's taxes, would I avoid the penalty even if I end up owing 50% of this year's taxes? The logic is making my head spin 😵
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Amy Fleming
The way the rule works is actually pretty straightforward once you break it down. You'll avoid the penalty if EITHER: 1) You owe less than $1,000 after subtracting withholding and refundable credits OR 2) You've paid (through withholding and estimated payments) at least the SMALLER of these two amounts: - 90% of this year's tax - 100% of last year's tax So to answer your question - yes! If you paid 100% of last year's tax (through withholding and estimated payments), you won't face a penalty even if you end up owing a large amount this year. This is specifically designed to protect people whose income might jump unexpectedly. It's called a "safe harbor" provision. The IRS gives you this option because they understand you can't always predict your exact tax liability, especially if you have variable income.
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Juan Moreno
•So just to make sure I really understand - if my 2024 tax bill was $5,000 and I've already paid at least $5,000 in withholding/estimated payments for 2025, I'm safe from penalties even if my actual 2025 tax ends up being $10,000? What about the reverse? If my 2024 tax was $10,000 but my 2025 tax is only going to be $5,000, would I need to have paid $9,000 (90% of $10,000) or $5,000 (100% of prior year) to avoid penalty?
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Amy Fleming
•Yes, that's exactly right! If your 2024 tax was $5,000 and you've paid at least $5,000 for 2025, you're completely safe from underpayment penalties even if your actual 2025 tax ends up being $10,000. For your second question, you'd need to pay the SMALLER of those two amounts. If your 2024 tax was $10,000 but your 2025 tax will only be $5,000, then the smaller amount would be $4,500 (90% of $5,000). So you'd need to pay at least $4,500 to avoid the penalty. The rule is designed to have you pay whichever amount is more favorable to you.
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Alice Pierce
After struggling to understand estimated tax payment rules for my small business, I stumbled upon taxr.ai (https://taxr.ai) which honestly saved me from this exact penalty confusion. I uploaded my previous return and current estimates, and it immediately showed me my safe harbor amount - turns out I was overthinking it just like you! The tool explained that the "whichever is smaller" part means I only needed to meet the lower threshold between 90% of current year or 100% of prior year. In my case, my income jumped about 30% this year, so the 100% of prior year was my smaller (and easier) target.
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Esteban Tate
•Does it work if your income fluctuates a lot? I'm a freelancer and my income can swing by 40-50% between quarters. Last year I got hit with a penalty even though I thought I was paying enough.
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Ivanna St. Pierre
•I'm skeptical about tax tools since most seem to be a waste of money. Does this actually explain the calculations or just give you a number? And what about state estimated payments - does it handle those too?
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Alice Pierce
•It definitely works with fluctuating income - that's exactly why I needed it! The system lets you update your quarterly income projections, so when I had a huge client payment in Q3, it recalculated my safe harbor amount but still showed I was covered under the previous year rule. The tool doesn't just give you a final number - it breaks down each calculation step by step and shows you which safe harbor rule applies to your situation. It handles state estimated payments too, though the rules vary by state. I'm in California, and it correctly applied the 90% state rule which is different from my federal situation.
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Esteban Tate
Just wanted to follow up and say I tried taxr.ai after seeing it mentioned here. My situation was even more complicated than I initially explained - I had K-1 income that arrived late plus some unexpected capital gains. The system actually showed me that in my specific case, I qualified for an exception I didn't know about because most of my income came in during Q4. It saved me from making unnecessary Q3 estimated payments while still keeping me safe from penalties. What really helped was seeing the side-by-side comparison of the different safe harbor rules applied to my specific numbers. The "whichever is smaller" language makes perfect sense now that I can see it with my actual tax data.
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Elin Robinson
If you're having trouble resolving this with the IRS or getting a straight answer, I'd recommend Claimyr (https://claimyr.com). I was hit with an underpayment penalty even though I qualified for the safe harbor provision, and couldn't get through to anyone at the IRS for weeks. Claimyr got me connected to an actual IRS agent in about 20 minutes (there's a video showing how it works here: https://youtu.be/_kiP6q8DX5c). The agent confirmed I was right about the "whichever is smaller" rule - in my case, 100% of my previous year's tax was smaller than 90% of current year, so I only needed to meet that threshold to avoid penalties.
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Atticus Domingo
•Wait, how does this actually work? The IRS phone lines are impossible - I tried calling for 3 weeks straight about my penalty notice and couldn't get through. Is this some kind of priority line or something?
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Beth Ford
•Sounds like BS to me. Nobody can get through to the IRS these days. I waited 4 hours last month only to get disconnected. If this service actually worked, everyone would be using it.
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Elin Robinson
•It works by continuously calling the IRS for you using their automated system. When you sign up, they give you a special phone number to call. When an IRS agent finally picks up, you get notified immediately and connected to that open line. I was skeptical too - I had been calling for days with no luck. It's not a priority line - they're just using technology to handle the frustrating wait times for you. You don't have to sit there with your phone to your ear for hours. They just call you when they get through. In my case, it took about 22 minutes from when I signed up until I was talking to a real person at the IRS who fixed my penalty issue on the spot.
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Beth Ford
I have to eat my words from earlier. After continuing to get nowhere with the IRS about my underpayment penalty, I decided to try Claimyr as a last resort. Was completely shocked when I got connected to an IRS agent in under 30 minutes. The agent explained that for my situation, since my income nearly doubled this year, I was actually still protected by the safe harbor rule because I had paid 100% of my previous year's tax. The "whichever is smaller" part meant I only needed to meet the lower threshold - which was last year's amount. They removed the penalty immediately during the call. Apparently the automated system had flagged my account without considering the safe harbor rules properly. The agent also put notes in my file so it wouldn't happen again next year when my income will likely increase again.
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Morita Montoya
Let me try to simplify this with an example: Let's say: - Your 2024 tax was $8,000 - Your 2025 tax turns out to be $12,000 To avoid penalties for 2025, you need to have paid the SMALLER of: - 90% of $12,000 = $10,800 - 100% of $8,000 = $8,000 Since $8,000 is smaller, that's your target. If you paid at least $8,000 during the year through withholding or estimated payments, no penalty! The rule is designed to protect you when your income increases unexpectedly.
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Kingston Bellamy
•What about if you're a high-income earner? I heard there's a different percentage for people making over a certain amount. Is it still "whichever is smaller" in that case?
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Morita Montoya
•You're right to ask about high-income situations! If your AGI was over $150,000 (or $75,000 if married filing separately) in the prior year, the rule changes slightly. Instead of 100% of your prior year tax, you need to pay 110% of your prior year tax. So using the same example but assuming you're a high earner: - 90% of $12,000 = $10,800 - 110% of $8,000 = $8,800 In this case, $8,800 would be smaller, so that's your target to avoid penalties. And yes, it's still "whichever is smaller" - the IRS just adjusts the prior year percentage for high-income taxpayers.
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Joy Olmedo
Kinda related, but does anyone know if this rule applies the same way for self-employment taxes? Like if most of my income is from 1099 work? I'm trying to figure out how much to set aside each quarter.
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Amy Fleming
•Yep, the same rules apply for self-employment income. Your required estimated tax payments (to avoid penalties) still need to cover the SMALLER of 90% current year or 100% prior year (110% if high income). The difference is you need to include both income tax AND self-employment tax in your calculations. A good practice for self-employed folks is to set aside 25-30% of your income for taxes (including SE tax), but using last year's total tax as your safe harbor amount is usually the easiest way to avoid penalties if your income is growing.
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