Most people don’t worry about paying federal income taxes for the year until they are preparing their returns the following spring. That’s because their employers regularly withhold money from their paychecks throughout the year. The American tax system is designed to be “pay as you go,” which means you need to pay most of your tax as you receive income rather than at the end of the year.
But if you’re one of the millions of Americans who don’t have a regular, salaried job, the IRS generally expects you to prepay your annual taxes quarterly based on what you guess you will earn for the entire year. These taxpayers include those who are self-employed, consultants, gig workers, landlords, investors who earn capital gains in taxable accounts and retirees.
Problem: It’s easy to make a mistake estimating your annual tax liability and paying the correct amount, especially if your income is uneven. Reason: The IRS automatically treats your income as though it is earned equally throughout the year. Example: An elderly couple earned no income last year until December, when they took a large distribution from their traditional IRA. But if they hadn’t already paid the proper estimated tax by the due date of each of the quarterly periods, they could incur steep penalties that can run hundreds or thousands of dollars. That’s true even if the taxpayers are due a refund when they file their income tax return. Overall, the IRS assesses about $7 billion annually just in estimated tax penalties.
This can all be very tricky, so Bottom Line Personal spoke to income tax expert Damien Martin, CPA, about how to accurately estimate taxes and avoid underpayments…and he offers strategies for sidestepping penalties.
FIGURING OUT YOUR ESTIMATED TAXES
If you owe $1,000 or more in a tax year and don’t have taxes withheld by an employer or from other sources, you are generally required to pay quarterly estimated taxes. Installment payments are due on April 15, June 15 and September 15 of the current year and then January 15 of the following year. When the due date falls on a legal holiday or weekend, the installments are due on the next business day.
If you don’t make estimated tax payments by the deadlines or if the payments aren’t at least the minimum required, the IRS can impose a penalty that consists of interest on the underpayment amount. The interest compounds daily for the period that the government didn’t have the money when it should have. The interest rate is set quarterly, based on Treasury debt rates (e.g., 7% for the second quarter of 2025).
For help calculating your estimated taxes, see IRS Form 1040-ES, Estimated Tax for Individuals at IRS.gov/pub/irs-pdf/f1040es.pdf. It includes a worksheet with rate schedules and instructions on how to estimate your adjusted gross income (AGI), project your liabilities and account for items such as self-employment tax and net investment income tax, as well as various tax credits, deductions and exemptions.
Remember: To avoid penalties, the IRS generally divides the year into four quarterly payment periods and expects your annual estimated tax to be paid each quarter. If you have fluctuating or irregular income throughout the year, use the IRS Annualized Income Installment Method in IRS Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts at IRS.gov/pub/irs-pdf/i2210.pdf and include it with your annual tax return. This method allows you to calculate your estimated-tax payments based on your actual income earned during specific periods, rather than assuming equal income distribution across all quarters. It also explains to the IRS why you underpaid your estimated taxes in earlier quarters and caught up in a later quarter.
Helpful: You can get help figuring out estimated taxes by calling the IRS at 844-545-5640. But if your taxes are complex, you may want to seek the help of a tax professional.
STRATEGIES TO REDUCE OR AVOID ESTIMATED-TAX PENALTIES
These caveats can help you reduce or avoid penalties…
Utilize IRS Safe Harbor Rules.
These are IRS provisions that let you avoid estimated-tax penalties as long as you adhere to certain conditions, specifically you pay at least 90% of the tax you owe for the current year…or pay 100% of last year’s tax liability (110% if your AGI exceeded $75,000 for singles or $150,000 for joint filers). It doesn’t matter how much you ultimately owe when you file your tax return. As long as the payments during the year exceed the safe harbor amount, you won’t be penalized. Careful: These safe harbor rules apply per quarter, not per year. So if you have income in the first quarter but don’t make payments that meet one of these conditions until the fourth quarter, underpayment penalties could apply.
Use employer withholding to avoid penalties.
If you work a salaried job and also have freelance work on the side, it may be possible to ask your employer to adjust your withholdings to cover any taxes you would have to pay on freelance or project-based work. Or: If you are married to someone who has taxes automatically taken out of his/her paycheck and you file your taxes jointly, your spouse may have enough taxes withheld to cover both of you.
Use your required minimum distributions (RMDs) from traditional retirement accounts to avoid penalties.
If you are a retiree and forgot to make estimated tax payments earlier in the year or the payments were too low, you have another option. When taxes are withheld from income, the IRS considers the withholding payments to be made evenly during the year—no matter when it was actually paid. What to do: Ask your retirement-account custodian or administrator for a distribution late in the year, and request a portion be withheld for federal income taxes. Make sure it’s enough to avoid incurring estimated tax penalties for the year.
If you do get hit with estimated tax penalties, ask the IRS for a break.
The IRS may waive the penalty if the underpayment was due to casualty, a natural disaster or other unusual circumstance…you are suffering grievous circumstances beyond your control such as a death in the family or illness…you are age 62 or older and retired or disabled and the underpayment was due to reasonable cause and not willful neglect. The IRS expects you to provide evidence and documentation to support your claims such as hospital records and/or court statements. Claiming you didn’t know the rules or made a mistake is not considered a reasonable cause. For more information see instructions to Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts at IRS.gov/pub/irs-pdf/i2210.pdf.
On your tax return, elect to apply your tax refund from the IRS to your estimated tax payments for the next tax year.
This saves you the hassle of remembering to write and send quarterly checks for the coming year. Note: You may be reluctant to make advance payments to the IRS before the deadlines, but it can make sense to use part of your refund to at least pay the first installment (due April 15), which often sneaks up on taxpayers.
Remember that you may owe estimated quarterly payments on your state income taxes as well.
In many cases, states have similar guidelines as the IRS, but not always. Examples: In California and New York, the income thresholds that trigger the need for estimated payments are much lower than the IRS thresholds. To find out more information and potential state penalties for estimated-tax underpayment, visit your state’s Department of Revenue website or consult your tax adviser.
