Safe Harbor Requirements for Estimated Tax Payments

Safe Harbor Requirements for Estimated Tax Payments

by Manjot Kaur & Rhodes Kline

Proper management of your tax liability is required to avoid paying penalties and interest to the government. Most taxpayers pay their share of tax during the year by having their employer withhold taxes from their paycheck. However, other taxpayers who are either self-employed or have income from other sources must find a method by which to pay an estimated amount of tax to the federal and state taxing authorities. Some of these other sources of income on which tax may not have been withheld include interest, dividends, gains from the sale of securities or other assets, rental income, prizes and awards, or alimony received. In order to avoid paying penalties and interest on your balance due, the IRS requires taxpayers to make quarterly estimated tax payments.

Do I Have to Make Estimated Tax Payments?

Generally, if you earn any income during the current year that does not have tax withheld, and if you expect to have a tax liability at year-end, estimated tax payments are most likely required. To help you understand if you are required to pay estimated taxes, reference the chart below.

taxpaymentsHow to Determine My Payment Amount?

As mentioned earlier, if you don’t have enough tax withheld, you should expect to make estimated tax payments. If you anticipate owing at least $1,000 in tax after subtracting your withholding and refundable credits, the IRS requires you to make estimated tax payments. In order to avoid an understatement penalty, you must pay either:

  1. 90% of the tax liability for the related tax return, or
  2. 100% of the total tax liability shown your previous year’s tax return
    1. If your AGI was more than $150,000 ($75,000 if your filing status is married filing separately), substitute 110% for 100%

Estimated tax payments are made quarterly during the year starting on April 15th. The following table can be used as a guide to help you determine when to send your estimated tax payment:

Quarter For Income Earned Due Date
1st January 1 through March 31 April 15
2nd April 1 through May 31 June 15
3rd June 1 through August 31 September 15
4th September 1 through December 31 January 15 of the following year

Saturday, Sunday, Holiday Rule – If the due date for an estimated tax payment falls on a Saturday, Sunday, or a holiday, the payment is considered due on the next business day.

How to Pay Estimated Tax?

There are multiple methods you can use to make your estimated tax payment. The payment options listed below only apply to the federal estimated tax payments. State tax payment options may vary by each state. Please visit your state website or contact your state tax department to get information regarding state estimated tax payments.

Credit an Overpayment – If you had an overpayment on your previous year’s tax return, you can choose to apply all or a portion of the entire overpayment towards your next year’s estimated tax payments.

Pay Online – To pay your tax online, please visit www.irs.gov/payments. The IRS accepts payments by debit or credit cards and from your bank account by using Direct Pay.

Pay by Phone – Paying by the phone is another secure and a convenient method of paying electronically.

  • If you prefer to pay by a debit or credit card, you can call one of the following providers. The providers listed below may also charge a convenience fee that varies by each provider.
    • Link2GOV Corporation: 1-888-PAY-1040
    • WorldPay US, Inc.: 1-844-PAY-TAX-8
    • Official Payments Corporation: 1-888-UPAY-TAX
  • If you prefer to use a direct transfer (EFTPS), you must enroll online or have an enrollment mailed you. If you are already enrolled in an EFTPS, the number to call is 1-800-555-4477.

What Happens If I Don’t Pay?

If your tax payments for any quarter are less than one-fourth of the estimated tax liability for that quarter, a penalty for underpayment of tax could arise. However, there are some situations in which you won’t be subject to a penalty. Those situations include:

  1. Your total withholding and estimated tax payments were at least as much as the previous year’s tax liability (or 110% of the previous year’s tax if your AGI was more than $150,000 and you made all required estimated tax payments on time).
  2. Your current year’s balance due is no more than 10% of the total tax liability and all required estimated tax payments were made on time.
  3. Your total tax for the current year minus any withholding and refundable credits is less than $1,000.

Please feel free to contact our office if you would like assistance with calculating your estimated tax liability or if you are expecting changes in your income.