The fourth-quarter estimated tax deadline for 2024 is Jan. 15, and missing a payment could trigger “unexpected penalties and fees” when filing your return, according to the IRS.
Typically, estimated taxes apply to income without withholdings, such as earnings from freelance work, a small business or investments. But you could still owe taxes for full-time or retirement income if you didn’t withhold enough.
You could also owe fourth-quarter taxes for year-end bonuses, stock dividends, capital gains from mutual fund payouts or profits from crypto sales and more, the IRS said.
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Federal income taxes are “pay as you go,” meaning the IRS expects payments throughout the year as you make income, said certified public accountant Brian Long, senior tax advisor at Wealth Enhancement in Minneapolis.
If you miss the Jan. 15 deadline, you may incur an interest-based penalty based on the current interest rate and how much you should have paid. That penalty compounds daily.
Tax withholdings, estimated payments or a combination of the two, can “help avoid a surprise tax bill at tax time,” according to the IRS.
What to know about the ‘safe harbor’ rules
One way to avoid penalties is by following the “safe harbor” rule, which means “you’re meeting that [IRS] pay-as-you-go requirement,” according to Long.
To satisfy the rule, you must pay at least 90% of your 2024 tax liability or 100% of your 2023 taxes, whichever is smaller.
The threshold increases to 110% if your 2023 adjusted gross income was $150,000 or higher, which you can find on line 11 of Form 1040 from your 2023 tax return.
However, you could still owe taxes for 2024 if you make more than expected and don’t adjust your tax payments.
“The good thing about this last quarterly payment is that most individuals should have their year-end numbers finalized,” said Sheneya Wilson, a CPA and founder of Fola Financial in New York.
How to make quarterly estimated tax payments
The “best way” to make estimated payments through your IRS online account, which shows history, pending payments and other information, according to the agency.
Alternatively, you could use IRS Direct Pay or the Treasury Department’s Electronic Federal Tax Payment System (EFTPS). You can also use a debit card, credit card or digital wallet.