A few weeks ago, I was talking with a client about his 2023 taxes. About the fact that he hadn’t paid estimated taxes in 2023. And that a probably big, but who-really-knew-how-big tax bill was looming before April 15. And that his CPA would give him some recommendations for paying estimated taxes in 2024. And that he should pay those estimated taxes so we’re not in this position again next year.


I sympathized because many clients don’t grok estimated taxes. And, well, they are confusing! I mused that I should probably write a blog post about estimated taxes, and he said, “OMG IF YOU DO ALL OF MY FRIENDS WILL READ IT BECAUSE THEY’RE JUST AS CONFUSED AS I AM.”

So, if you find today’s blog post helpful, you have this anonymous client to thank. I hear he likes chocolate truffles. (Just kidding. That’s me. I like chocolate truffles. I don’t know what his weakness is.)

What Are Estimated Taxes?

Simply put, estimated taxes are tax payments that you directly pay to the federal and/or state government throughout the year. 

Investopedia defines them as “a quarterly payment of taxes for the year based on the filer’s reported income for the period.” (Spoiler: Even though we often talk about “quarterly” payments; estimated taxes are, in fact, not quarterly. Which is part of the confusion. See below.)

If you work a jobbity-job (a “W-2” job), and you get a salary, your employer withholds income taxes from your salary—and submits it to the federal government—before you receive your paycheck. Most likely, this takes care of your tax obligations throughout the year. 

If you have other types of income, taxes might not be withheld, or not withheld sufficiently. So you have to pay taxes yourself. Paying those taxes throughout the year is an estimated tax payment.

Why Should You Pay Estimated Taxes?

There are two reasons, in my opinion, to pay estimated taxes.

Avoid Penalties (and Interest)

You are supposed to pay taxes on your income more or less as you receive it. You can’t earn money all year, not pay a single dollar in taxes, and pay your whole tax bill on April 15. Well, you can, but you’ll get penalized for it.

If you have a W-2 job, your employer does this for you: when you receive your paycheck from your employer, they have already withheld taxes on your income, and they submit that money to the government. 

But if you have income that you are having insufficient taxes withheld from or you are not paying sufficient taxes on directly, at the right time, you will end up being penalized for paying the taxes late and charged interest on the the amount paid late. Paying enough estimated taxes at the right time allows you to avoid penalties and interest charges. 

Avoiding penalties doesn’t necessarily require that you pay all the tax due on the income as you receive it. Just enough of the tax due. (More on this below.) You can still end up with a big remaining tax liability come April 15, even if you pay enough estimated taxes to avoid penalties. Which brings us to:

Avoid a Gigantic April 15 Tax Bill

Have you ever done your taxes for the previous year and had either TurboTax or your CPA tell you that you owe another $50k? Or $100k? In taxes? Yeah…that’s not nice. Not a lot of people have a spare $50k or $100k cash lying around. And even if they did, it’s painful to part with it, without warning!

Paying estimated taxes can help you avoid this fate. If you are paying estimated taxes throughout the year that are close to your full tax bill (not just enough to avoid penalties, which can be a much lower number), then when you prepare your tax return (or, god willing, have a good tax professional prepare it), your remaining tax liability should be quite small. Yay!

A Tweak, Now That Interest Rates Are Higher

Now that you can get a good interest rate on cash, it’s tempting to want to hang on to your cash as long as you can. Why would you pay the IRS a dollar in taxes before you have to? Exactly.

Even if you know how much you owe in full, you could choose to make estimated payments only enough to avoid penalties. But then, but then! You should set aside the cash for the remaining tax bill in a high-yield savings account or money market fund.

That way, even though you haven’t paid the full tax bill, you’ll have all the money available to pay it, come April 15. And in the meantime, you’ve been earning 4-5% interest.

The higher the interest rate, the more appealing this strategy. Just please take a moment to consider how much of a hassle this is, and how many extra dollars this will actually get you (after paying taxes on that interest income!). And remember, you are allowed to make decisions that cost you money if it brings you convenience or less stress!

You Should Probably Pay Estimated Taxes When…

To beat this drum again: If you have a W-2 job that pays you a salary and no other source of income, you likely don’t need to pay estimated taxes. Your employer will withhold income tax enough from your paycheck.

Here are some times when you probably should pay estimated taxes:

[Please note that I’m talking about federal taxes. States all have different tax regimes so it’s just too darn hard to go into it here. In general, investment income will likely require estimated tax payments at the state level, and RSU and bonus income will not. Either you or your tax professional should pay attention to state-level rules!]

You receive Restricted Stocks Units (RSUs). 

When RSUs vest, income taxes are due then and there. (Read up on more bits and pieces about RSUs, if they continue to confuse you.) Your employer will withhold federal taxes from that income at a default 22% rate, regardless of what your actual tax rate is. (22% is the withholding rate used for “supplemental wages,” which RSUs are considered. That 22% changes to 37% if your supplemental wage income is over $1M.)

That is just what is withheld. The problem is that what is withheld isn’t necessarily what you owe. If you make over $95k as a single person or over $190k as a married couple (in 2024), your top federal tax rate is more than 22%, so you’ll still owe more taxes on the RSUs than what your company withholds.

A small but growing number of big tech companies (ex., Google, Meta, Airbnb) allow you to withhold more than 22%. This is a wonderful thing that simplifies your tax situation tremendously. If you can withhold more than 22%, you might not need to pay estimated taxes anymore!

You have just gone through an IPO.

IPOs are a special case of RSUs. When a company goes IPO, on that first day of the IPO, a bunch of RSUs vest (assuming your company’s IPO works like pretty much every IPO I’ve ever seen)…and they’re likely all underwithheld for taxes, creating a gigantic remaining tax bill for you.

Thankfully, some companies, at least, allow their employees to choose a higher-than-22% withholding rate at IPO time.

You receive a bonus.

Same thing applies here as applies to RSUs: Bonuses are considered supplemental wages and are often withheld at only a 22% federal income tax rate.

You exercise stock options.

If you exercise stock options (either non-qualified or incentive), you always need to think about taxes.

If you exercise non-qualified stock options (NSOs), you owe income tax the moment you exercise. You owe income taxes on the difference between the exercise (aka, strike) price and the value of the stock. As with RSUs, your employer (current or former) will likely withhold or require payment of 22% federal taxes. If 22% is less than your actual tax rate, you’ll owe more taxes.

If you exercise incentive stock options (ISOs), you might or might not owe taxes. Only if that “spread” between exercise price and the value of the stock is big enough will you owe taxes (in the form of Alternative Minimum Taxes).

Tools like those provided by Carta (if your options are held there) and SecFi (which anyone can access) can help you estimate whether you owe taxes and how much you owe. A tax professional can get a whole lot more accurate in the calculation.

You sell investments at a large gain.

No taxes are withheld when you sell a stock or fund. You can owe 0%, 15%, or 20% on the gains (if you’ve owned the investment for over a year, i.e., “long term capital gains”), or even a higher percentage for investments owned less than a year (“short term capital gains”). Because nothing is withheld, that means you need to directly pay the taxes owed.

I’m probably not gonna cry for you if you’re in a position to have investments that have grown so much (heartless b*tch that I am!), but still it can be painful and confusing. You might find yourself in this position if, for example, you exercised a whole bunch of stock when your company was private, it went public, the price went way up, and now now you have a giant pile of valuable company stock. Or hell, maybe you just bought a bunch of AAPL stock in 2010 and have just held on until now. (Seen more than one client in that position!)

You receive investment income.

Even if you don’t sell anything, your investments can still give you income. Dividends, interest, capital gain distributions (like from mutual funds). No withholding happens there, and it can add up!

You receive self-employment income.

Maybe you have a side-hustle, or you’re trying out a new career as a consultant or coach or freelance whatever. If you get paid 1099 (i.e., self-employment) income, then income taxes are not withheld. 

Deadlines for Paying Estimated Taxes

The deadline for paying estimated taxes, at the federal level, are:

  • April 15, for income earned January through March (3 months)
  • June 15, for income earned April through May (2 months)
  • September 15, for income earned June through August (3 months)
  • January 15, for income earned the previous year’s September through December (4 months)

These might vary by a day or two, depending on which day the date falls on.

For funsies, if you’re in California, you have only three deadlines: April 15, June 15, and January 15.

How Much Should You Pay in Estimated Taxes?

The answer to this question depends, again, on what you’re trying to accomplish: just avoid penalties or actually stay on top of your tax bill?

Avoid Penalties and Interest

If you’re just trying to avoid underpayment penalties and interest charges, then your estimated taxes can be based on last year’s taxes. This is known as the “Safe Harbor” for estimated taxes. If you pay in at least 110% of the tax you owed for the previous year, you can avoid penalties. (That number is “only” 100% for people making under $150,000.)

(You can also pay in at least 90% of what you owe for the current year, but that’s harder to know definitively ahead of time. You also avoid penalties if you owe less than $1000, after subtracting withholdings and credits.).

The CPAs my clients work with provide estimated tax recommendations when they do last year’s taxes, and the recommendations are usually based on last year’s taxes. I’m gonna guess that tax software like TurboTax does, too.

But that’s only going to get you as far as not owing penalties. You could still end up with a surprise giant tax bill come April 15.

But if last year was an unusually high income/high tax year…

Paying estimated taxes based on last year’s income and last year’s tax liability works best when your income is kinda similar year to year. But if you went through an IPO last year or sold a bunch of stocks at a gain last year, then last year’s income and last year’s tax liability is likely way higher than this year’s income and tax liability will be.

Which means that paying that “110% of last year’s tax liability” safe harbor will be unnecessarily onerous. To be sure, you’ll get all the excess tax payments back in a refund when you file your taxes on April 15, but in the meantime, you’ve had to scrounge up and fork over a bunch of cash that you really didn’t need to have.

In this situation, the “90% of this year’s tax liability” is a better bet. And for this, working with a tax professional is a good idea.

Avoid a Gigantic April 15 Tax Bill

If you want to stay on top of your actual tax liability—whether you pay it all as you go, or reserve some of the cash on the side to earn interest—then it gets more complicated. And, by complicated, I mean you should likely work with a tax professional who can run a tax projection in Q3 or Q4 to figure out what your actual tax liability is likely to be.

Before that time, you can probably just use either those safe-harbor payments, or some back-of-the-napkin estimates. 

What do I mean by “back of the napkin”? I’m generally pretty leery of any such calculations of taxes, because the tax code is so complicated and there are dependencies where you wouldn’t expect them. But as long as you’re bringing in some tax expertise at some point within the year, I think it’s usually okay to do this, for simplicity’s sake.

For example, let’s say you estimate your top tax rate will be 35% federal. (Look at 2024’s tax brackets to make an educated guess.) Your RSU income is withheld at 22%. Well, then, every time RSUs vest, you should pay another 13% of the RSU income.

If $100,000 worth of RSUs vest and $22,000 worth of shares get withheld for federal income? You need to pay another $13,000 in federal income tax. Is that right? No, is it ballpark right? Usefully so. Then you can get more accurate calculations later in the year with a tax projection.

When it comes to capital gains when you sell an investment, another back-of-the-napkin calculation would be: Take the gain (not the total proceeds, but the sale price minus your cost basis, i.e., what you paid for it) and multiply it by 15% or 20% (depending on what your long-term capital gains tax rate is). There will, of course, likely also be a 3.8% Net Investment Income Tax on top of that, but oh my god, this blog post can only take so much.

Oh, look, NerdWallet has a capital gains tax calculator. Have I vetted it? No.

Have I Mentioned You Should Hire a CPA?

Yeah…Some of you have simple tax situations. Or you love this tax stuff to figure it out well enough to get you to tax filing time, when all will be straightened out.

For the rest of you? CPAs (or EAs, enrolled agents) are such a godsend. Yes, they cost money. But you will likely save money (by avoiding the mistakes you’d make yourself) and will definitely save stress (yes, even though you still have to gather a ton of documents for them).

Do you want to work with a financial planner who will help you stay on top of your tax liabilities so you actually understand what’s going on, when, and why? Reach out and schedule a free consultation or send us an email.

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Disclaimer: This article is provided for educational, general information, and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. We encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.

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