Whether it’s through payroll withholding, quarterly payments, or a combination, the IRS requires taxpayers to pay a certain amount of income tax during the year. The total amount you’re required to pay depends on your adjusted gross income (AGI) for the previous year. For the current year, your “required annual payment” is the smaller of:
For calendar-year taxpayers paying their estimated taxes in installments, payments are generally due on the 15th of April, June, September, and January of the following year.
Each of the four installments generally should equal at least 25% of your required annual payment.
If you receive income unevenly (because you have a seasonal business, for example), you may be able to vary your payment amounts and still avoid a penalty by using the “annualized income” method. See the image below for more.
If you do not pay your estimated tax by the due date, the IRS may assess a penalty equal to the product of the IRS interest rate on deficiencies times the amount of the underpayment for the period of the underpayment.*
If you discover that you’ve been underestimating your taxes, you may be able to resolve the problem by requesting an increase in withholding from your or your spouse’s paychecks for the remainder of the year. Or, if you are taking taxable distributions from an individual retirement account, 401(k), or another retirement plan, you could increase the withholding from year-end distributions. With either alternative, the IRS will apply the withheld tax pro-rata over the tax year to reduce prior underpayments of estimated tax.
* You won’t owe an underpayment penalty if the tax shown on your current year return — reduced by withholding taxes paid during the year — is less than $1,000.
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