Did your tax professional leave you feeling lost or flustered with regard to paying quarterly estimated taxes? It’s understandable to be confused when signing those checks and vouchers; however, it’s an effective way to protect yourself from underpayment penalties.

The self-employed aren’t the only taxpayers required to pay quarterly estimated taxes; individual taxpayers can, too. Income from stock sales, property sales, alimony, partnerships, S-corporations, retirement or pension plans, or other sources where taxes may not be withheld may require you to pay estimated taxes or face a potential underpayment penalty.

Any individual taxpayer who pays less than 90% of their current tax liability, or if your tax due after withholding and credits is more than $1,000, may face an underpayment penalty. However, you can protect yourself by paying quarterly estimated tax payments that are equal to the lesser of 90% of the tax shown on your current year’s tax return or 100% of the tax shown on your prior year’s tax return.

It’s not easy calculating whether you may owe more in taxes; therefore, consult your tax professional to perform a year-end tax projection to determine your tax liability and calculate estimated tax payments for you.  There are many strategies to minimize or even eliminate underpayment penalties.  But, we, as tax professionals, are unable to help AFTER the year has ended. 

Penalty for Underpayment of Estimated Tax

In general, taxpayers are not subject to an estimated tax penalty when the tax due on a tax return is less than $1,000 after withholding and refundable credits, or they have paid 90% of the current year’s tax or 100% of the prior year’s tax.

Currently, in 2024, the penalty for not making estimated tax payments when you have an underpayment is 8% annually or about 0.66% per month. By NOT paying quarterly estimated taxes, it’s similar to taking a loan from the IRS at an 8% interest rate.

How are Estimated Tax Payments Calculated?

Taxpayers pay the IRS in four installments, each totaling 25% of their annual tax liability after accounting for withholdings and credits.

How and when to Make Estimated Tax Payments?

You can pay estimated tax payments electronically using the IRS Direct Pay or by mail-in voucher available from your tax professional.

Although these payments are called “quarterly” estimates, they do not coincide with a calendar quarter. Estimated tax payment deadlines fall around the following dates: April 15, June 15, Sept. 15 and Jan. 15.  Payments due on Saturdays, Sundays, or holidays can be paid on the next business day.

Disclaimer: All content and information provided is for general educational purposes only and should not be considered professional financial or accounting advisory. For tailored guidance related to your situation, consult with a qualified business advisor.

---

Chris Chapman, CPA, CGMA, is a Partner and Business Advisor at The Garabedian Group, Inc. in Fresno, CA. He has been in practice for more than 20 years and specializes in family business support, succession planning, and tax. To contact Chris Chapman, call (559) 472-7370 or visit www.thegarabediangroup.cpa.