Estimated tax payments without the guesswork

If you are self-employed, own a business, collect rent, or have income that nobody withholds tax from, the IRS expects you to pay during the year, not just at filing. Those payments are due on four dates, roughly in April, June, September, and January.

Why estimates go wrong

Most people guess. They pay what feels right, income jumps in a good quarter, and a large bill shows up with a penalty attached. Others skip a payment because cash was tight and try to catch up later.

A steadier way to set them

• Use a safe harbor. Paying at least 100 percent of last year's total tax (110 percent if last year's adjusted gross income was above $150,000) generally avoids the underpayment penalty, even if this year's income is higher. Paying 90 percent of this year's tax also works.
• Move money into a separate savings account every time you are paid. A set percentage keeps the payment from feeling like a surprise.
• Recheck when income changes. A new client or a big month is a reason to rerun the numbers.
• Put the four dates in your calendar.

An example

Say you owed $14,000 in tax last year. Four payments of $3,500 meet the prior-year safe harbor. If this year turns out much better, you settle the difference when you file, without a penalty for underpaying during the year.

Texas has no state income tax, but if you earn income in a state that does, you may need to make estimated payments there too.

What to do next

Look at last year's return, find the total tax figure, and divide it by four. That gives you a first number to work with. If your income is uneven, bring your numbers to a consultation and we will help you build a plan that fits.