What Are Estimated Tax Payments and How Do I Avoid Penalties?

Sean O’Keefe
Sean O’Keefe

Jul 1, 2022

1 min read
What Are Estimated Tax Payments and How Do I Avoid Penalties?

Making estimated tax payments is one way to avoid a huge lump sum tax payment at the end of the year. Instead, you send money to the IRS throughout the year (often quarterly) to reduce the amount you might owe at the end of the year.

Anyone who earns self employment income, rental income, capital gains, or investment income should look into making estimated tax payments to avoid a huge payment ― or worse, tax penalties.

How to Calculate Estimated Tax Payments

Estimated tax payments are due quarterly (the 15th of January, April, June, and September). If you don’t make these payments and end up owing on your taxes, you could be hit with a penalty. The penalty is essentially the IRS charging you interest for not paying taxes throughout the year. For the 2019 tax year, the interest rate for underpayment is 6%.

Remember, your estimated tax payments are just that: estimates. To calculate your tax payment, look at last year’s unfunded tax liability (your tax liability minus any tax withholdings) and divide it by four (since taxes are paid quarterly).

Keep in mind this may or may not align with what you’ll actually owe in taxes. Deductions and income can vary from year to year, but this estimate should at least give you an educated starting point.

How Can I Avoid Tax Penalties?

The best way to avoid tax penalties is simple: make quarterly estimated tax payments. There are very few cases in which the IRS will forgive a nonpayment or underpayment, such as a natural disaster or casualty, so don’t count on getting out of paying your fines.

You may still owe at the end of the year, but the sum won’t be nearly as much (and neither will your penalty).

For more guidance on taxes, feel free to contact our team.

This article is provided for illustrative purposes only; it does not provide personalized tax, legal, financial, or other professional advice. Your situation may be different; consult a professional for information concerning your individual tax, financial, or legal situation before taking any action.