The most common anxiety among self-employed clients is whether they are paying enough in quarterly estimates. There is a rule that removes the question, and a surprising number of people have never had it explained.
The penalty is for underpayment during the year
The underpayment penalty is not about whether you pay by the filing deadline. It is about whether you paid enough, on time, during the year. Paying the whole balance in April does not avoid it.
The safe harbors
You generally avoid the penalty if you pay at least the lesser of:
- 90% of the current year's tax, or
- 100% of last year's tax — rising to 110% if your prior-year adjusted gross income was above a threshold.
The second one is the useful one, because you already know last year's number. You do not have to forecast a year that has not happened. Take last year's total tax, apply the appropriate percentage, divide by four, and pay that.
If you then have a spectacular year, you will owe more in April — but you will not owe a penalty, because you met the safe harbor.
Withholding is treated differently
This is genuinely useful. Withholding from a W-2 is treated as paid evenly across the year regardless of when it actually happened. Estimated payments are credited when made.
That means a household with one W-2 spouse can fix an underpayment late in the year by increasing withholding, and it counts as though it had been paid all along. An estimated payment in December does not get that treatment.
The quarters are not even
Estimated tax "quarters" do not line up with calendar quarters. The payment periods and due dates are set by the code, and the third and fourth periods are not three months apart. Diarise the actual dates.
Uneven income
If your income arrives unevenly — a seasonal business, a one-off sale — the annualised income method lets you match payments to when income was actually earned rather than paying a quarter of the year's estimate in April on money you had not yet made. It is more work and it is worth it in the right situation.
What to do
- Find last year's total tax on the return.
- Apply 100% or 110% depending on prior-year AGI.
- Divide by four and diarise the due dates.
- Pay through the IRS system so there is a record.
- Revisit mid-year if the year is going very differently, and adjust withholding rather than estimates if you have a W-2 available.
This article is general information, not tax advice, and tax rules change from year to year. Confirm current-year figures and talk with a professional about your specific situation before acting.
Common questions
How much should I pay in quarterly estimates?
The simplest safe answer is 100% of last year's total tax divided by four, or 110% if your prior-year AGI was above the threshold. That meets the safe harbor and removes the need to forecast the current year.
Does paying everything in April avoid the penalty?
No. The underpayment penalty is about whether enough was paid on time during the year, not whether the balance is settled by the deadline. Paying it all at filing still incurs the penalty.
Can I use withholding instead of estimates?
Yes, and it has an advantage: withholding is treated as paid evenly across the year regardless of when it happened. A household with a W-2 spouse can fix an underpayment late in the year by increasing withholding, which an estimated payment in December cannot do.
Have a question about your situation?
Robert prepares returns for individuals, contractors, and small business owners across Weatherford, Aledo, Willow Park, Springtown, Mineral Wells, and the rest of Parker County. Bring your questions — the first conversation is free.