How to Keep the IRS Happy and Avoid Underpayment Penalties with Your Estimated Tax Payments
Managing taxes can be one of the trickiest parts of running a small business, especially if you’re doing it on your own. One of the biggest challenges is making sure you don’t get hit with underpayment penalties for estimated taxes. If you’re not familiar with these penalties, they can be a costly surprise that eats into your profits. But the good news is, with the right knowledge, you can easily avoid them. Let’s break down what you can do to stay on top of estimated taxes.
What are underpayment penalties for estimated taxes?
When you work for yourself, the IRS wants their share throughout the year, not just at tax time. Think of it like paying rent — you wouldn't wait until December to pay all 12 months at once, right? The IRS feels the same way about taxes. Miss these quarterly payments, and you'll be looking at penalties that could have been avoided. And while penalties might not seem huge at first, they add up quickly and can turn into an unnecessary financial burden.
The “safe harbor” rule: your new best friend
Here's some good news — the IRS actually tells us exactly how to avoid penalties. They call it the “safe harbor” rule. This lets you avoid underpayment penalties as long as you pay at least:
90% of the total tax you owe for the current year, or
100% of the tax you owed the previous year (110% if your adjusted gross income was over $150,000).
By meeting one of these requirements, you’re considered to be within the safe harbor and won’t be penalized. Even if you have a killer year and make way more than last year, remember to make safe harbor payments and you won't face penalties as long as you hit these numbers.
Payment timing: quarterly is key
Mark these dates on your calendar:
April 15
June 15
September 15
January 15 (of the next year)
These are your quarterly tax deadlines. Missing them is like missing a credit card payment — it'll cost you extra.
If you’re only making payments once a year when you file your tax return, you’re setting yourself up for penalties.
Working a regular job? Here’s a pro tip.
If you’re still working for someone else and have a salaried job in addition to your business, you might not need to worry about making quarterly estimated payments. Instead, you can adjust the withholding on your W-2 income to cover both your business income and salary.
To do this, just increase the amount of tax that’s withheld from your paycheck. This way, you can use your regular paycheck to effectively cover the taxes you owe on your business income, and you don’t have to stress about making separate payments. You can update your withholding by submitting a new W-4 to your employer.
Handling seasonal income
Some businesses are seasonal — maybe you run a beachside cafe or a Christmas tree farm. The IRS gets it. You can pay based on what you actually earn each quarter instead of having to estimate your annual income upfront. This takes more math but could save you money if your income varies a lot throughout the year.
Oops! I got a penalty anyway.
Don’t panic if you’re hit with a penalty. The IRS might give you a break if you have a good reason (like a family emergency or honest mistake). You can file Form 2210 to request a waiver and explain your reasoning. The IRS will review your case and may reduce or eliminate the penalty if they find your story credible.
Another option is to reach out to a tax professional for help. Sometimes penalties happen simply because you didn’t fully understand the process, and a tax pro can help you review your payments and make sure you’re back on track moving forward.
In conclusion
Managing estimated taxes isn't as complicated as it might seem, but it does take some planning. Think of it as setting aside money for taxes before it burns a hole in your pocket.
Looking for a partner in your tax journey? At Archer Lewis, we speak plain English, not accountant-ese. We're here to help you understand your numbers and keep more of what you earn. Learn how easy tax planning can be when you have the right team in your corner.