All taxpayers are required to pay taxes throughout the calendar year to avoid paying Underpayment Penalties.
Most employees have income taxes withheld from their wages to help pay in these taxes throughout the year, but depending on your overall tax situation, these payments may not be sufficient to avoid the underpayment penalty.
For self-employed individuals, if you’re not paid wages from your business, you don’t have the option of having income tax withheld from your income. Instead, you pay in your taxes by making quarterly estimated tax payments.
Step-by-step instructions for making individual federal and most state quarterly estimated tax payments can be found on my website here: How to Make Quarterly Estimated Tax Payments
There are two major guidelines to help determine how much you should pay in throughout the year. To avoid penalties, you should pay the lessor of:
Pay at least 90% of your current year’s tax liability
This requires you to know or estimate your current year tax liability. You can work with your accountant to determine how much your current year’s tax liability will be and/or use your prior year’s taxes as a guide.
Safe Harbor
Using this method you would determine how much you’re required to pay in for the current year using amounts from your prior year’s taxes. Depending on your income and filing status, you would pay either 100% or 110% of your prior year’s total tax amount towards your current year’s tax liability. This rule is common referred to as Safe Harbor.
Any remaining tax is due with your tax return by April 15th. An extension to file your tax return does not extend the due date for paying any tax due with your return.
Contact me to discuss this topic in further detail
Please note: the information on this website is intended to provide general advice to start the discussion with your tax professional. The information on this website may not apply to your specific situation. Only an experienced professional with the details of your specific situation can advise you on making the best decision. Contact me or your tax professional to discuss the information on this site to make an informed decision.