Do I really have to make estimated payments?

Many taxpayers do not realize that it is not enough to just pay all of your tax liability by April 15 in some cases.  The IRS is concerned if you will owe them too much money at the end of the year.  They know that sometimes telling you to save up the money for your taxes is too risky and you might go spend it instead of sending it to them.  So, they decided if you owe them more than $1,000, they want it paid to them throughout the year, not just at the end. 

If you fail to make the required payments throughout the year, the penalty for underestimating might apply to you.  It is really a daily interest calculation between the time you should have made the payments and when you actually paid them.  From a marketing and collections prospective, the word "Penalty" sounds more persuasive to make you want to send Uncle Sam some money.

So how do you determine what the amount is that you should send?  You know the answer to this one, right?  "It depends!"  The required annual payment for most individuals is:

  • the lower of 90% of the tax shown on the current year’s return OR
  • 100% of the tax shown on the return for the previous year (or 110% if the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately).

Now let’s talk about how to avoid the penalty and who does not need to make estimated payments.  The underpayment penalty doesn’t apply to you if any of these items are applicable to you:

  1. if the amount of tax remaining due on your tax return is less than $1,000,
  2. if you had no tax liability in the prior year,
  3. if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or
  4. for the fourth (Jan. 15) installment, if you aren’t a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.

If your income is not evenly earned throughout the year and larger portions were earned at the end of the year, you may be able to detail out the income through annualized method and reduce or eliminate the estimated penalty too.

With proper tax planning, you should know your entire tax liability for the year and the minimum amounts that need to be sent to the IRS or state tax departments throughout the year.  Assuming your income increases each year, take advantage of estimated payments to invest your tax money in an interest bearing savings account or CD until it is required to be remitted.

Donna Bordeaux is a Certified Public Accountant and Personal Financial Specialist with Bordeaux & Bordeaux, CPAs, PA in Lake Wylie, SC (a suburb of Charlotte, NC).  For further information about Donna or her firm, please visit