Tax Smarts: A Guide to Estimated Tax Payments

CPA in Austin, TX calculating estimated taxes

If you earn income that’s not subject to tax withholdings, you’ll want to consider making estimated tax payments. Due four times each year, estimated tax payments are applied to your current year tax liability. Here are a few situations where an estimated tax payment may be necessary:

  • You are self-employed or receive distributions from a partnership
  • You have a side hustle – Uber, DoorDash, VRBO
  • You earn significant investment income

Calculating the Estimated Tax Payment

When it comes to calculating estimated taxes, there are two methods: using an estimated tax safe harbor or using actual year-to-date (YTD) financial information. Each approach has its benefits and considerations. Let’s explore them further:

Estimated Tax Safe Harbor

The estimated tax safe harbor is designed to simplify the process of calculating estimated taxes. It allows you to avoid underpayment penalties by paying either 100% or 110% of your prior year’s tax liability in equal installments throughout the year.

By following the safe harbor rules, you are considered to have met your tax payment obligations regardless of your actual income for the current year. Reasons to choose the safe harbor approach:

  • Your income and financial situation will not significantly change from the previous year
  • You prefer a straightforward approach that minimizes the risk of underpayment penalties

Actual Year-to-Date (YTD) Income

The actual YTD income approach calculates your estimated taxes based on your current year income, deductions, and other relevant financial information. This method requires a more thorough assessment of your tax liability, as it considers your current financial situation and any changes that may impact your tax liability compared to the previous year.

This approach is beneficial if you expect significant changes in your income, deductions, or credits compared to the prior year or if you prefer a more precise estimation of your tax liability to avoid potential overpayment or underpayment. Reasons to choose the actual YTD income approach:

  • If you expect significant changes in your income, deductions, or credits compared to the prior year
  • You anticipate major life events such as marriage, divorce, the birth of a child, or changes in employment that may impact your tax liability
  • You prefer a more precise estimation of your tax liability to ensure you pay the appropriate amount and avoid overpayment or underpayment

It’s worth noting that you’re not limited to using one approach for all four quarters. You can switch between the safe harbor and actual methods if your circumstances change during the year. It offers flexibility in adjusting your payment strategy based on changes in your income.

Take Charge of Your Finances

Whether you’re self-employed, have additional income sources, or simply want expert guidance on calculating and managing your estimated taxes, Walker Glantz has you covered. Our knowledgeable CPAs will work closely with you to understand your unique financial situation and develop a tailored strategy that maximizes your tax savings while keeping you in compliance with IRS regulations.

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David Miller, CPA

David Miller, CPA
Tax Manager
Walker Glantz, PLLC