You should pay estimated taxes if you expect to owe at least $1,000 in tax for the year after withholding, or if your withholding and credits are less than 90% of the current year's tax or 100% (or 110% for higher incomes) of the prior year's tax. This generally applies to those with self-employment, investment income, or other significant non-wage income, as regular employees have taxes withheld from paychecks. Use Form 1040-ES to calculate and pay these quarterly taxes to avoid penalties for underpayment.
Paying Taxes Early When You Have No Underpayment Penalty
If you're not subject to an underpayment penalty — meaning the two situations above apply to your situation — you can also pay your taxes early. However, there's no additional benefit to paying your taxes early.
Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time. The IRS urges you to check your options to avoid penalties for underpayment of estimated tax.
For most, the best choice is to file taxes early — or at least as soon as you can. This way: The IRS may process your return and agree on your tax liability sooner. You will know sooner if you owe and have more time to save money.
It's always in your best interest to pay in full as soon as you can to minimize the additional interest and penalties and paying what you can when you file will also minimize those charges. Paying electronically is a convenient way to pay your federal taxes.
The biggest tax mistakes people make include filing late, math errors, incorrect personal info (like Social Security numbers), forgetting deductions/credits (like EITC), misreporting income, not signing forms, and making errors with bank details for direct deposit, all leading to delays, penalties, or missed savings, with using tax software or professionals helping avoid these common pitfalls.
If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.
The "90% tax rule" (or safe harbor) is an IRS guideline to avoid penalties for underpaying estimated taxes, generally meaning you must pay at least 90% of your current year's total tax liability through withholding or estimated payments, or 100% (or 110% for high-income earners) of the prior year's tax, to avoid underpayment penalties. This "pay-as-you-go" rule applies to income not subject to standard withholding, like self-employment or investments, requiring timely payments to prevent surprise bills and penalties.
Having enough tax withheld or making quarterly estimated tax payments during the year can help you avoid problems at tax time. The IRS urges you to check your options to avoid penalties for underpayment of estimated tax.
A pre-tax deduction lowers tax liabilities for employers and employees. However, the employee might owe taxes in the future when they use the benefit that the deduction was applied toward. For example, an employee who retires will owe taxes when they withdraw money from a pre-tax 401(k) plan.
The Downside of Overpaying
That extra money could be sitting in your business account, helping with cash flow or funding growth. For example, if you're overpaying $2,000 each quarter, that's $8,000 tied up until the IRS gives it back as a refund. That's money you could've used for marketing, equipment, or payroll.
Businesses that show losses are more likely to be audited, especially if the losses are recurring. The IRS might suspect that you must be making more money than you're reporting. Otherwise, why would you stay in business? Most likely to be audited are taxpayers reporting small business losses.
Not reporting all of your income is an easy-to-avoid red flag that can lead to an audit. Taking excessive business tax deductions and mixing business and personal expenses can lead to an audit. The IRS mostly audits tax returns of those earning more than $200,000 and corporations with more than $10 million in assets.
1. Missing Important Tax Documents. Filing too early can lead to mistakes if you don't have all the necessary tax documents, such as W-2s, 1099s, or deductions-related paperwork. Filing before receiving all necessary forms could result in an amended return later.
Some people intentionally overpay taxes because they see a refund as “forced savings.” While the intention is understandable, it's not a smart strategy. A better approach is: Adjust your withholding correctly. Automate transfers into savings or investments.
Common tax return mistakes that can cost taxpayers