Do You Need to Make an Estimated Tax Payment? Understanding the Rules to Avoid Penalties
If you’ve had a big year with investment income—such as capital gains, interest, or dividends—or saw a jump in self-employment income, you may need to make an estimated tax payment to the IRS. Failing to do so could result in underpayment penalties. Fortunately, the IRS provides guidelines, including the safe harbor rule, to help taxpayers avoid those penalties.
What Are Estimated Taxes?
Estimated taxes are periodic payments made to the IRS throughout the year to cover your tax liability, particularly if you don’t have enough tax withheld from your paycheck or other income sources. These payments are typically required if you earn income that isn’t subject to automatic withholding—common examples include:
- Self-employment income
- Investment income (e.g., capital gains, dividends, or interest)
- Rental income
- Income from side gigs or freelancing
The IRS generally requires individuals to pay taxes on a “pay-as-you-go” basis. If you fail to make sufficient payments throughout the year, you might be subject to an underpayment penalty, even if you eventually pay your full tax bill when filing your return.
When Are You Required to Pay Estimated Taxes?
You’ll need to make estimated payments if:
- You expect to owe at least $1,000 in tax after subtracting withholding and refundable credits.
- Your withholding and credits are less than 90% of your expected tax liability for the current year or less than 100% of your previous year’s tax liability (110% for higher earners).
The second condition is a key part of the IRS safe harbor rule, which helps taxpayers avoid penalties.
Understanding the Safe Harbor Rule
The IRS provides the safe harbor rule to protect taxpayers from underpayment penalties, even if they owe additional tax at year-end. Here’s how it works:
- If your adjusted gross income (AGI) was $150,000 or less in the prior year, you can avoid penalties by paying 100% of the tax you owed last year through a combination of withholding and estimated payments.
- If your AGI was more than $150,000 last year, you’ll need to pay 110% of your prior year’s tax to qualify for the safe harbor.
Alternatively, you can avoid penalties if you pay at least 90% of the tax you owe for the current year. However, if your income fluctuates significantly, relying on the prior year’s tax liability (the 100%/110% rule) is often a safer and simpler approach.
The easiest way to check for your safe harbor threshold is to look at your 2023 tax return, check line 24 on your Form 1040:
That number will contain your total tax from last year. To meet the safe harbor, you need to either pay 100% or 110% of that number throughout 2024. Failure to reach that threshold could result in underpayment penalties, and you want to avoid those.
Think of it like this: taxes are what you owe, penalties are what you give away.
Here’s an example looking at a couple who is W2’d with AGI of $250,000 in 2024… If their total tax from line 24 was $37,500, then they need to have paid $41,250 in taxes throughout 2024.
To check, the couple should look at their year-to-date federal withholdings from a recent pay stub and see if that number totals $41,250 or more. If it is less, they should make an estimated payment to cover the difference.
Investment Income and the Need for Estimated Payments
For taxpayers with substantial investment income, paying estimated taxes becomes particularly important. Large capital gains, interest, or dividends are not subject to withholding, which means you could quickly find yourself underpaying taxes without realizing it.
Examples where you may need to make an estimated payment include:
- Selling appreciated stocks, real estate, or other assets, leading to large capital gains.
- Receiving significant dividends or interest from investments.
- Having a windfall from a one-time event, such as the sale of a business or appreciated inherited securities.
If your investment income has risen this year, calculating and paying an estimated tax can help you avoid a surprise bill and penalties when filing your return.
The deadline to make an estimated payment for 2024 is January 15, 2025.
Payments can be made electronically via the IRS website, through the IRS2Go mobile app, or by mailing a check with IRS Form 1040-ES.
Plan Ahead to Avoid Penalties
If your income has changed significantly this year, particularly due to investments, it’s wise to review your tax situation early. Using the IRS safe harbor rule to calculate your estimated payments can provide peace of mind and help you steer clear of underpayment penalties.
When in doubt, consult a tax professional to ensure you’re on track. By planning ahead, you can manage your tax liability efficiently and avoid costly surprises during tax season. If you’re not sure if you need to make an estimated payment before the January 15th deadline, feel free to reach out to us!
Note: this article was written with the assistance of AI and edited by the author.

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