As the middle of September approaches, taxpayers across the United States face the third quarterly deadline for estimated federal taxes. According to guidance shared by financial commentator Andrew Schrage, individuals who expect to owe the Internal Revenue Service (IRS) $1,000 or more in taxes after factoring in withholding and refundable credits must submit their third installment payment by September 15.
Many individuals miss this crucial date because they attempt to accurately forecast their annual tax liability months in advance. However, attempting to predict total earnings and deductions in September is exceptionally difficult. Fortunately, the IRS provides a reliable mechanism known as the safe harbor rule to help filers avoid costly underpayment penalties without requiring precise forecasting.
Understanding the Safe Harbor Rule
The safe harbor rule dictates that taxpayers can bypass underpayment penalties by ensuring that their total withholding and estimated payments meet a specific baseline from the previous year. Under IRS guidelines, filers must cover the lesser of 90 percent of their current year’s tax liability or 100 percent of the total tax reported on the previous year’s tax return.
By relying on the second option, taxpayers can simply examine the total tax line on last year’s Form 1040, divide that figure by four, and pay that exact amount for each quarterly installment. This strategy ensures compliance regardless of how much a taxpayer’s income fluctuates or grows during the current year, provided the previous year’s return covered a full 12-month period.
There are specific income thresholds to keep in mind. If a taxpayer’s adjusted gross income on the previous year’s return exceeded $150,000, or $75,000 for married individuals filing separately, the target threshold increases to 110 percent of the prior year’s total tax. Dividing that adjusted total by four yields the required quarterly payment amount.
Who Needs to Pay Quarterly Estimates?
The obligation to make quarterly payments is determined by financial activity rather than professional titles. While freelancers, independent contractors, and gig economy workers are widely familiar with this requirement, the rule also applies to other segments of the population. Landlords collecting rental income, retirees making withdrawals from traditional Individual Retirement Accounts (IRAs) without sufficient tax withholding, and individuals who have realized capital gains from selling stocks must also evaluate whether they will owe $1,000 or more at tax time.
For individuals who missed previous deadlines in April or June, financial experts recommend making those past-due payments immediately. Tax underpayment penalties accrue daily like interest for every day an installment remains unpaid, meaning prompt action helps halt the accumulation of additional charges before the final reconciliation in January and April.
Streamlined Payment Options
Submitting estimated payments to the tax authority has become increasingly accessible through digital platforms. Taxpayers can utilize IRS Direct Pay, a complimentary online service that allows users to transfer funds directly from a bank account without requiring user account creation. When submitting payments through this portal, filers must select estimated tax for Form 1040-ES and designate the appropriate tax year. Alternatively, individuals who already maintain an Electronic Federal Tax Payment System (EFTPS) account can use that established platform.
For individuals who also earn traditional wages through a W-2 employment setup, another viable strategy involves increasing withholding amounts for the remainder of the year. The IRS treats withholding as having been paid evenly throughout all four quarters, which can effectively retroactively cover missed estimated installments from earlier in the year. Establishing clear payment calendars and consulting qualified tax professionals can ultimately transform the annual tax filing process from a source of seasonal anxiety into a manageable routine.
Source: Money Crashers
