Paying taxes isn’t just about getting the amount right—it’s about getting the timing right, too. The IRS and state tax agencies expect payments throughout the year, and falling short can lead to penalties. However, there are several ways to avoid underpayment penalties, and some unique circumstances may even qualify for waivers.
At Brickley Wealth Management, our dual expertise in investment advisory and tax planning allows us to help clients navigate the complexities of estimated tax payments. Whether you’re a high-income earner, a business owner, or someone with fluctuating income due to stock options or bonuses, understanding these rules can help you avoid unnecessary penalties.
When Is a Tax Payment Considered Timely?
For most taxpayers, estimated tax payments are due quarterly:
- April 15
- June 15
- September 15
- January 15 (of the following year)
If these dates fall on a weekend or federal holiday, the deadline is typically extended to the next business day. Missing these deadlines or not paying enough throughout the year can trigger an underpayment penalty.
How to Avoid Underpayment Penalties
There are a few standard ways to ensure you’ve paid in enough tax to avoid penalties:
1. The 90% Rule
If you’ve paid at least 90% of your total tax liability for the current year through withholding and estimated payments, you won’t face an underpayment penalty. For example, if your 2025 total tax liability is $40,000, as long as you’ve paid in at least $36,000 (90%) throughout the year, you can settle the remaining balance by April 15, 2026, without penalty.
2. The 100%/110% Safe Harbor Rule
If 90% seems like a moving target, you can instead look at your prior year’s tax liability. As long as you’ve paid in:
- 100% of your previous year's tax (if your adjusted gross income was $150,000 or less for married filers or $75,000 or less for single filers), OR
- 110% of your previous year's tax (if your adjusted gross income was above those thresholds),
you’ll be safe from underpayment penalties.
3. The Seasonal or Annualized Income Exception
This is particularly useful if you experience irregular income spikes during the year—such as receiving a large bonus, exercising stock options, or earning significant investment income in a single quarter. The IRS allows you to match tax payments to income timing, so if most of your income arrived late in the year, you may not need to pay estimated taxes earlier.
Special Circumstances That May Qualify for Waivers
Even if you technically underpaid, certain situations may allow you to request a penalty waiver:
1. Federally Declared Disasters
If you live in an area affected by a federal disaster, the IRS often grants automatic extensions and may waive underpayment penalties.
2. Serious Illness or Unforeseen Hardship
If you experienced a serious illness, an unexpected financial hardship, or another significant life event, you may qualify for a waiver.
3. New Retirees with Income Shifts
Taxpayers who recently retired and have fluctuating income may also qualify for an exception, particularly if their income changed unexpectedly.
4. Special Timing Payments (January Rule)
If you pay your remaining tax balance by January 15 and file your return by January 31, you may be able to eliminate penalties—though this can be difficult to execute in practice.
Alternative Strategies: Using Withholding to Cover Shortfalls
If you realize late in the year that you haven’t paid enough estimated tax, there are still options to fix it. Withholding from wages, Social Security, or IRA distributions is treated as if it were paid evenly throughout the year—even if it’s withheld in December.
For example, if you’re taking a required minimum distribution (RMD) from an IRA, we can increase your withholding on that distribution to cover any shortfalls in estimated taxes, effectively reducing or eliminating penalties.
Bringing it All Together
Managing estimated tax payments can be complex, especially for individuals with stock compensation, business income, or irregular cash flow. At Brickley Wealth Management, we integrate tax planning and investment strategies to help clients minimize tax penalties while optimizing cash flow and investment opportunities.
If you’re unsure whether you’ve met safe harbor rules or want to explore proactive tax planning strategies, reach out to us. Proactive planning today can help you avoid surprises (and penalties) down the road.
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