How Year-Round Planning Can Help You with Estimated Tax Payments

Picture this: It’s April, and your tax preparer has sent you your tax return link with a note saying, “Please call me before opening.” You open without calling and are greeted with a huge amount due that you were not expecting. 

This can be a common surprise for business owners and those with income outside of regular employee wages. Estimated quarterly tax payments are a requirement for taxpayers who own a business or who have other sources of income flowing into their personal tax returns. These types of income do not withhold enough to help pay down the eventual tax liability due on April 15th. 

With year-round tax planning, it is possible to avoid penalties and other cash flow surprises that can lurk around the corner. In this article, we’ll explain estimated tax payments and how you can best prepare to pay them with the help of BGM.

What Are Estimated Tax Payments?

Generally, you pay estimated tax on any income that doesn’t withhold taxes when it’s paid. It includes income such as earnings from self-employment/gig income, investment income or business income. Regular employee wages and distributions from retirement plans usually withhold from your payment, which should cover the taxes that will be due on that portion of income.

Estimated tax payments must be made quarterly to avoid underpayment penalties (a renamed form of interest). They’re usually due April 15th, June 15th, September 15th and January 15th (with adjustments for holidays or weekends).

The required estimated tax payments quarter are based on whichever is lower: 

1. 100% of the prior year’s tax (minus any money that was withheld) or 
2. 90% of the current year’s tax (minus any money that was withheld). 

For taxpayers who make more than $75k (single) or $150k (married filing jointly) of adjusted gross income, that 100% of the prior year’s tax turns into 110%.

Who Must Make Quarterly Estimated Tax Payments?

For affected taxpayers, the IRS and states require quarterly payments based on the expected amount they’ll owe when they file their annual taxes. 

Taxpayers need to make estimated quarterly payments if they expect to owe $1,000 or more beyond what withholdings will cover. 

Individuals may be required to pay estimated taxes if they have income that doesn’t withhold taxes. This is common for:

• An employee receiving a bonus, which is not withheld the way regular wages are. Bonuses are usually taxed at the “supplemental” pay rate, which is too low when the bonus is a large amount that bumps you into a higher tax bracket.
• Someone receiving gig income, such as freelance work.
• Rental property owners.
• People with a fair amount of brokerage account/investment activity.
• Employees changing jobs, which could result in different withholding.

Who Doesn’t Have to Pay Quarterly Estimated Tax Payments?

The IRS doesn’t require estimated tax payments if your tax total was zero or if you were not required to file taxes the previous year. For this, you must have been a U.S. citizen or resident alien the whole year.

Understanding Safe Harbor

If you’re required to make estimated payments but fail to pay enough, you’ll be subject to an underpayment penalty. Luckily, the IRS provides a safe harbor rule. With this rule, you can avoid the penalty if one of two things is true:

• You owe less than $1,000 in tax
• You paid at least 90% of the tax for the current year or 100% of the tax shown on your return for the prior year (whichever is smaller).

The Consequences of Not Making Quarterly Tax Payments

Making estimated tax payments every quarter can seem like a hassle, but not paying them could have consequences that far outweigh the additional work. Some of those consequences could be:

Owing Large Sums of Money All At Once

Without planning and paying estimated tax payments, you’re at risk of being underpaid when it comes to the April 15th deadline. Getting a $50,000 surprise on April 14th is not fun to deal with, especially when those funds are stuck in the business or the stock market. 

In addition to what you owe, you may also be subject to an underpayment penalty. The taxing agencies calculate this penalty based on: 

• The amount of underpayment for a specific quarter
• The period when the underpayment was due and underpaid
• The interest rate

In 2024, the penalty rate for the underpayment of estimated tax payments was 8%. 

Some of you may say, “Who cares? I can get a better return if I keep my money in x investment or y business.” But not everyone can guarantee that type of return on investment.

If you’ll receive the majority of your income toward the end of the year, then it’s possible to annualize your income. This way, the estimated tax payments are pushed to the later quarters. A common example would be the large capital gain from the sale of an investment in November. That income did not exist in the first, second or third quarters, so you should not be penalized for that income earlier in the year.

Subpar Cash Flow Planning

Cash flow planning is vital for understanding how much cash you will need in upcoming quarters. This way, you can plan when to exit an investment, withdraw from a retirement account or make a distribution from the business. 

Without planning, taxpayers can get into a cycle of being “surprised” every April 15th. Each year, to pay the higher taxes, you may need to inefficiently withdraw funds from a source you didn’t really want to touch. You could end up pulling from a retirement account or an investment you thought would grow soon.

Overpayment of Taxes

All of the above can be the consequences of underpaying your estimated tax. However, overpayment can also be a concern.

When you miscalculate your estimated tax payments and pay more, you won’t get it back until your annual return is filed and processed. This leaves you with less money to spend throughout the year. It also affects your earnings; your money is sitting with the government, collecting no interest for you.

Prepare for Quarterly Taxes With Year-Round Advisory Services

To avoid cash flow surprises, take advantage of year-round tax planning services. Your tax advisor can help you calculate your estimated tax payments throughout the year so that you know exactly what to expect on April 15th. When you do this, filing your tax return becomes just a formality to memorialize the numbers you’ve discussed all year.

BGM provides dedicated financial advisory services to help you plan for tomorrow so you can focus on today. Our financial experts and tax professionals calculate what you owe and guide you through the process, helping you avoid under- or overpayment.

What to Expect During Your Quarterly Tax Planning Meeting

When you partner with BGM, you’ll connect with someone each quarter. This way, you can share updates on current income, projected income and any other events that have happened or will be happening.

What To Bring to Your Quarterly Tax Planning Meeting

To prepare for the meeting, you’ll need several things:

• Your tax returns from the previous year (if you used a different accountant).
• Any year-to-date payroll stubs to show current pay and withholding.
• Current financial statements from your businesses.
• Projected income summaries from brokerage accounts.
• Any additional notes on your expectations regarding income for the rest of the year.

1. Discuss Previous Tax Returns & Changes

During the meeting, we’ll review your tax returns from the last year. We’ll then discuss any changes for the upcoming year. For example, are there capital gains you had last year that you don’t this year? Have you taken on a new business venture outside of your employment?

2. Review Financial Expectations

Next, we’ll review your financial expectations for your business or side gig for the upcoming year. For example, are you expecting a better or worse year? By understanding your expectations, we can better explain how those expectations will affect your payments.

3. Project Quarterly Estimated Tax Payments

After discussing changes and expectations, we’ll request investment statements and pay stubs to understand your current withholding. With this information, we’ll carefully project the amount you should pay each quarter.

4. Make the Estimated Tax Payments

Each quarter, we’ll send you reminders when it’s time to pay, ensuring you don’t miss a deadline. When you’re ready, you can pay online using the IRS website or state website. You could also send checks to each.

Let BGM Help You With Tax Planning

With BGM, you have access to expert year-round advisory services, helping you avoid the surprise of an overwhelming tax bill. Let us help you understand your estimated tax payments, ensuring you pay the right amount, on time, protecting your bottom line. Reach out to our team today!