Estimated tax penalties a nuisance and sometimes unwelcome surprise.
Predicting what we will owe each year before the year is complete can be complicated, and sometimes it can seem unfair to owe penalty on taxes that are not really due yet, however the authority has been granted to to the IRS to make sure we are paying tax obligations throughout the year, which is basically a normal process for most employed individuals.
The estimated tax process is designed to have the same "throughout the year" effect.
Most taxpayers owe estimated tax payments when they:
Payments are required to reduce or eliminate underpayment penalties, however these amounts are not considered due for IRS collection purposes until the statutory deadline for paying tax (normally April 15 for individual filers). The minimum threshold for estimated tax is $1,000 federally and varies by state.
Federally, there are two safe-harbors which can help you to avoid potential penalties, so long as you pay enough to cover your tax obligation (estimates, withholdings and other payments):
*If your income is significantly variable throughout the year, or if you have specific circumstances where a one time income event occurs during the you may qualify for a different schedule using “annualization” or “seasonal” installments
First determine your balance due without respect to estimates paid. In most cases, 25% is due each quarter… and the penalty must actually be computed separately for each quarter.
The penalty is a function of rate/365, published quarterly and multiplied by the 25% amount and again by the number of “late days.”
e.g. Assume only withholdings were paid during the year & a $1,000 balance is due by April 15, 2024 (day 366 per IRS tables), simply subtract the quarterly due date from the payment date, to calculate the “late days.”
Penalty calculates to $48.82 as follows:
Each state has their own rules around estimates and you should check with your state revenue agency, however in most cases, interest rates are slightly higher (normally +1%) and the amount is
Additional Resources for State information regarding estimated taxes
Most agencies encourage electronic payment and will keep a history for you. We recommend that you retain your receipts and verify your bank records to confirm your payments clear. Below are a few local state resources.
In most cases for calendar year individuals, your payments are due on the 15th of the April, June, September and January (of the following year). However, some states have due dates requiring a December payment, such as New Hampshire for business related taxes.
Links to Resources Related to Estimates