Understanding and managing your estimated tax payments is an important aspect of proactive tax planning and strategy. For individuals with diverse income sources and corporations anticipating significant tax obligations, timely and accurate estimated payments are essential to avoid underpayment penalties.

Individuals

Although the Internal Revenue Code does not directly impose an obligation to pay estimated taxes, it does impose an addition to tax (referred to as a penalty) for underpayment of tax through withholdings an estimated taxes.  Estimated tax payments are often necessary when taxpayers have income from interest, dividends, self-employment income and capital gains.

Individuals expecting to owe at least $1,000 in taxes (after withholdings) for the 2024 tax year should consider making quarterly estimated tax payments to avoid an underpayment penalty.

Estimated tax payments can be made under the installment method or the annualized installment method.  Payments under both methods are due by the 15^th of the month of April, June, September and January of the following year.

Installment Method

Under the Installment Method, four equal payments are made throughout the year.  A required installment payment is generally 25 percent of the lessor of:

• 90 percent of the current year, or
• 100 percent of the prior year

Note – for high-income taxpayers with adjusted gross income over $150,000, the prior year percent is increased to 110 percent.

Annualized Installment Method

Under the Annualized Installment Method, four payments are made that reflect the income earned in the period immediately before the installment due date.  This is more advantageous for taxpayers who do not receive taxable income evenly throughout the year.

Under this method, each required installment is the excess of:

• The applicable percentage of the tax for the year computed by placing the taxable income for the months preceding the installment due date on an annualized basis, over
• The total amount of any prior required installments for the year.

Corporations

Corporations expecting the total tax for the year to be $500 or more must make estimated tax payments to avoid an underpayment penalty.  Corporations must make the estimated tax payments in four installments due by the 15^th of the 4^th, 6^th, 9^th, and 12^th month of the tax year.

The minimum payment required to be made is calculated using the lowest amount determined under one of the following four methods:

• Current year method

  • Corporations would pay 25% of the tax on their current year’s tax return each quarter.

• Preceding year method

  • Corporations would pay 25% of the tax shown on their prior year’s tax return each quarter. However, for corporations with taxable income over $1 million in any of the last three tax years, this method can only be used to determine their first payment. This method also cannot be used if the prior year’s return that was for less than a 12-month period or if the prior year’s return wasn’t filed when there was tax due.

• Annualized income method

  • This method is best for corporations with fluctuating income.  Corporations would pay their “annualized tax” each quarter. The annualized tax amount is computed over four overlapping periods with each period beginning on January 1^st and ending before the due date of the quarterly payment. Each period then assumes income will be received at the same rate over the full year. This allows corporations to make estimated payments based on the taxpayer’s income at that point in the year.

• Seasonal income method

  • Corporations with recurring seasonal patterns of income can figure their income by assuming the income they will earn in the current year will be earned in the same pattern as preceding years.

Be Proactive

Accurate estimated tax payments are essential to avoid penalties and manage your tax liabilities effectively. The Wegner CPAs tax advisors are well versed in the intricacies of tax planning for both individuals and corporations. If you are looking for assistance identifying the correct method for your unique situation, our team is here to help!