Avoid Tax Surprises: How to Plan and Pay Estimated Taxes

When we deliver your tax return, your transmittal letter will list not just payments that are due with the return for the previous year, but potentially also estimates (prepayments) to be made throughout the upcoming year. You may be wondering why we are asking you to make these payments – isn’t making a payment for last year bad enough?

The IRS and most states require that taxes that will be due for the upcoming year be paid in advance, so taxes due in April 2026 for the year 2025 need to be paid during the 2025 calendar year. W-2 employees typically make the required prepayments through withholding on their paychecks, but all other taxpayers need to pay their estimated taxes directly to the IRS and/or their state to satisfy this requirement.

On the federal level, the IRS expects individuals to pay estimated tax if they will owe $1,000 or more after withholding and credits. If you do owe more than $1,000 when your return is filed, you may be subject to an underpayment penalty. This penalty can be avoided if you pay at least 90% of the current year tax due, or 100% of the prior year tax due (110% if your AGI was more than $150,000 for the year).

For example, if your income was $200,000 in 2024 and your total tax was $50,000, you should pay $55,000 during 2025 through withholding and/or estimates to avoid an underpayment penalty.

Each state has its own requirements to also be considered. For example, in Georgia, individuals must make estimated tax payments if they expect to have more than $1,000 in gross income from sources other than wages (income not subject to withholding), and their total gross income exceeds the threshold for their filing status. In Alabama, the threshold is $500 or more of tax due after withholding and credits.

Once you have an understanding of what different tax authorities require, you will need to understand how it applies to your own situation.

There are three primary scenarios that would lead to an estimated payment requirement for an individual.

First and most common, a taxpayer that primarily has self-employment income as a sole proprietor, S corporation shareholder, or from a partnership/LLC will typically need to pay estimates. These taxpayers don’t have W-2 withholding so the only option is to pay estimates on Form 1040-ES. Payment dates for 2026 along with the remainder of 2025 are due as shown below, and in general 25% of estimated tax is due with each payment:

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Estimated payment requirements would also be applicable to a taxpayer that is retired or has income primarily from investments or other passive sources. Because this taxpayer has no withholding from an employer, the only way to make the required payments is through estimates. However, requesting that withholding be set up for Social Security payments and retirement distributions can help offset the amount to be paid for estimates, even though it’s not always enough to cover the full liability.

Finally, some W-2 employees may need to pay estimates.  This is usually due to one of the scenarios above being applicable in addition to a W-2 job. For example, an S-corporation shareholder may choose to have a portion of their taxes paid through withholding and a portion through estimates to cover the S-corporation profit. A W-2 employee might have additional income from a sole proprietorship or LLC, and thus a requirement to pay enough to cover those taxes in addition to taxes on the salary from their regular job.

We calculate your estimates if they are applicable for the upcoming year when we prepare your individual return and will include the 1040-ES vouchers for reference.

You can pay the estimates with the vouchers via mail, on the IRS Direct Pay website, through your IRS online account, through the IRS2Go app and several other methods. If you are a W-2 employee, you can also consider adjusting your W-4 to increase withholding by the amount of recommended estimates for the year.

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