Are you paid up?

Are you self-employed? Do you own a business or have investment income? Was your withholding too low this year due to life changes, or an old W-4? If the answer is yes to any of those questions, you might need to make an estimated tax payment.

If you're an employee, your company withholds income tax on your wages or salary every paycheck, and those tax dollars are sent to the Treasury Department on a strictly regimented schedule. This makes the IRS happy. But if you're self-employed or have other income that isn't subject to withholding, you'll endup paying what you owe the following April, when you file your tax returns. Estimated taxes are the IRS' way of making sure that you pay tax on your income as you earn it, no matter how you earn it.

Ideally, you would pay quarterly estimated tax payments to match exactly how much income you earned in each quarter. However, since that's very difficult to do accurately and timely, there's a rule in place called a "safe harbor rule." It allows you to make an educated guess based on your prior year taxes and your expected current year taxes; as long as you follow the guidelines, you won't be charged underpayment penalties.

The fourth quarter estimated tax payment due date is January 15. If you're concerned about penalties, review your tax returns from last year; the general rule is that you must pay estimated tax if both of the following are true:

1. You will owe at least $1,000 in taxes when you file your 2024 return

2. You expect your withholding and credits to be less than 90% of the tax on your 2024 return, or less than 100% of the tax on your 2023 return

In other words, if you withheld less taxes that you did in 2023 and you're going to owe more than you did in 2023, you should probably make an estimated payment. (If you're a farmer, fisherman, or "higher income" earner, the rules are different.)

Of course, if you'd rather hold onto your hard-earned money and pay what you owe absolutely no sooner than April 15, you can absolutely do that. Just know that the IRS will send you a bill for late payment penalties, underpayment penalties, and interest at their soonest convenience!