The safe harbor rules
These measure what you paid during the year against this year’s tax and last year’s. Meeting one is generally what keeps an underpayment penalty away, even when more is still due with the return.
- First payment period
- Second payment period
- Third payment period
- Fourth payment period
Federal estimated tax
How to estimate your quarterly tax payments
The federal income tax is pay-as-you-go. When nothing is withheld from what you earn, you work out what the year is likely to cost and send it in across four payment periods.
Who pays them
Income with nothing held back from it
An employer sends tax in from every paycheck. Money that arrives any other way usually has no one doing that, so the job falls to the person who earned it.
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Self-employed people
Sole proprietors and freelancers are paid in full, with no tax taken out of what comes in.
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LLC members and partners
A share of the profit lands on the owner’s own return, whether or not it left the business account.
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S corporation shareholders
Salary carries withholding. The profit that passes through on top of it may not be covered.
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Employees with other income
Interest, dividends, rent or side work can leave more owed than the withholding on a paycheck covers.
How the estimate is built
A projection of a year that has not finished
Nobody knows the final number in advance. The aim is a reasonable figure that can be corrected as the year turns.
- Step one
Project the income
Start from what you expect to earn across the whole year. Last year’s return is the usual guide.
- Step two
Take off what reduces it
Business expenses, then the deductions you expect to claim on your return.
- Step three
Work out the tax
Income tax, plus self-employment tax where it applies, less credits and anything already withheld.
- Step four
Spread it over the periods
Many people split the total evenly. Uneven income can follow what was earned so far instead.
Safe harbors and shortfalls
What happens when the estimate turns out wrong
An estimate rarely lands exactly. Owing a little more at filing time and being penalised for underpaying are two different things.
A short payment
The penalty is looked at period by period, so a larger payment later does not always undo a shortfall earlier.
A late payment
The cost builds with time, so a missed payment is generally cheaper sent sooner than saved for the return.
The subjects
Estimated tax, one subject at a time
Articles on these subjects are on the way.
- Who owes estimated tax
- Income with nothing withheld, above a level the IRS sets.
- Projecting income
- Using last year, this year so far and what is likely to change.
- Self-employment tax
- Social Security and Medicare for people who work for themselves.
- The safe harbor rules
- What was paid, measured against this year’s tax and last year’s.
- The four due dates
- When each payment period closes and its payment falls due.
- Uneven income
- Seasonal work, and the method that follows what was earned so far.
- Late or short payments
- How the underpayment penalty works, and what can reduce it.
- State estimated payments
- Many states collect their own, on their own schedule and forms.