Estimated Tax Rules

Understanding Pay-As-You-Go U.S. Income Tax

The U.S. income tax system requires taxpayers to pay taxes as they earn income, either through:

• Withholding taxes (for employees)
• Estimated tax payments (for self-employed individuals or those without withholding)

Failure to pay enough tax throughout the year may result in an underpayment penalty.

Safe Harbor Rules for Avoiding Underpayment Penalties (2024)

To avoid penalties, total withholding and estimated payments must be at least the smaller of:

• 90% of the tax due for 2024, or
• 100% of the tax due for 2023 (110% if 2023 AGI was over $150,000 / $75,000 MFS)

Exceptions: No Penalty Applies If

• Tax due after withholding is less than $1,000.
• Taxpayer had no tax liability on a full-year 2023 return.

Quarterly Estimated Tax Payment Deadlines (2025)

Estimated tax payments must be made in four equal installments:

*A fourth quarter 2025 payment is not required if the taxpayer files Form 1040 and pays any tax owed by January 31, 2026.

Late payments result in penalties, which are calculated as interest on the underpaid amount for the number of days the payment is late.

Estimated Tax vs. Withholding Tax

• Estimated taxes must be paid in four equal installments, and late payments result in penalties.
• Withholding is considered evenly spread over the year, allowing late-year adjustments to avoid penalties.

An employee who underpays withholding early in the year can eliminate an underpayment penalty by increasing withholding later in the year.
A taxpayer who underpays estimated taxes cannot offset penalties by overpaying in later quarters.

Exceptions to the Underpayment Penalty

1. IRS Waiver for Special Circumstances
   • Possible waiver for casualty, disaster, disability, or retirement after age 62.
   • Must prove reasonable cause (not willful neglect).
2. Annualized Income Installment Method
   • Useful for taxpayers with fluctuating income (e.g., seasonal earnings).
   • Payments are based on actual earnings per quarter rather than fixed installments.
3. Using Actual Payment Dates for Withholding

• By default, withholding is treated as paid in equal installments, but taxpayers can elect to apply it to the actual quarter paid.
• Helps reduce penalties if substantial withholding occurs early in the year.

For additional IRS guidance, visit www.irs.gov.