Are Estimated Tax Payments Required?

A common question people ask is, am I required to make quarterly estimated tax payments? I guess the best answer is: “sort of.” It’s not a matter of you “must,” but there are penalties for not doing so.

The IRS will assess a penalty against you if you don’t make estimated payments and you owe more than $1,000 when your return is filed. 

The penalty is based on whether or not you paid in the minimum required amount during the year. The minimum amount is the smaller of: 90% of the current year tax, or 100% of the prior-year tax (or 110% if your income is above $150,000 for all filing statuses except married filing separately, where it’s $75,000).

The penalty itself is not huge. For example, I prepared a return earlier this year where someone owed $25,000 and made $0 of estimated payments. The penalty came to around $500. (I am using round numbers here; looking at the actual return, the penalty came to 2.1% of the amount owed; the penalty amount will vary from taxpayer-to-taxpayer depending on specifics of the return.) So not huge but still there, and if you can swing making the estimated tax payment, you’ll save yourself having to pay the penalty in addition to the tax.