Dealing with Estimated Tax Payments

Have you ever had to make estimated tax payments? If they feel more painful than having taxes withheld from your pay, you are not alone. How you pay your taxes changes the way you feel about them even though the total tax is the same. There are multiple behavioral finance effects that help explain why.

One is Loss Aversion. Humans feel losses more intensely than gains. When you make estimated tax payments, you are actively parting with money you already "have." Withholding, on the other hand, feels like you never had that money in the first place. Another is Mental Accounting. Humans tend to categorize money based on its source or purpose. When taxes are withheld from your paycheck or a retirement income payment, you do not directly see them. You see the net amount that arrives in your bank account. Estimated tax payments are clearly visible and unbundled from your gross income. Even though a dollar of tax withholding is the same as a dollar of estimated tax payment, the dollars feel differently since they come from separate "accounts."

Most Americans pay their income taxes through withholding. The modern system of paycheck withholding started in World War II with the Current Tax Payment Act of 1943. If you have income that is not covered by withholding, you may need to make estimated tax payments for income you receive throughout the year. This is because we have a pay-as-you-go tax system and you may be subject to underpayment penalties and interest if you wait until the tax filing deadline to pay. Some examples of income not covered by withholding include self-employment income, side hustle or gig work income, taxable investment income (interest, dividends, and capital gains), rental income, and retirement income (without withholding).

If you expect to owe at least $1,000 in federal taxes after withholding and credits, estimated tax payments are normally required. Estimated tax payments are generally due for a given tax year by April 15th, June 15th, September 15th, and January 15th of the following year. If you do not pay enough tax throughout the year through withholding and/or estimated tax payments, you may owe an underpayment penalty (plus interest) that is calculated by how much you underpaid and how long the amount was unpaid during the year. The underpayment interest rate can change quarterly and is currently 6% for April to June 2026, down from 7% from January to March 2026. The rate was 3% in 2021.

You can usually avoid underpayment penalties by meeting one of two safe harbor requirements:

1. Pay at least 90% of your current year's total tax, or
2. Pay at least 100% of your prior year's total tax (110% if your prior year Adjusted Gross Income is greater than $150,000 for single and married filing jointly, and greater than $75,000 for married filing separately)

Making estimated tax payments requires action. You must calculate the amount, figure out which account you are going to use to make the payment, and then actually schedule and send the money. Depending on your situation, you may be able to avoid the hassle of making estimated tax payments by adjusting withholding from other income sources. The tax system considers amounts paid from withholding as if they were paid evenly throughout the year, even if you increase withholding later in the year. Here are some strategies you may be able to use to avoid having to pay estimated taxes:

1. Increase Your Paycheck Withholding. Submit an updated Form W-4 to your employer to increase your withholding.
2. Use or Increase Retirement Income Withholding. Review your tax withholding from Social Security income, pension income, military retired pay, and/or annuity payments. Submit the appropriate form to add or increase withholding (e.g., Form W-4P, W-4V). You may be able to make changes online with your provider.
3. Use or Increase Withholding for Non-Periodic Payments from Retirement Accounts. A minimum of 20% federal withholding is mandatory for payments made directly to you. Submit a Form W-4R to your plan administrator to request a higher withholding percentage. You may be able to make changes online with your provider. IRA distributions typically have 10% federal withholding (which can be waived or increased). For your IRAs, please contact us if you would like to adjust your federal or state tax withholding.
4. Increase Withholding from Bonuses or Commission Income Received as an Employee. Employers normally apply 22% federal withholding for bonus and commission payments under $1 million using the Percentage Method. The other option is the Aggregate Method which combines your regular pay and bonus pay into one paycheck and can lead to higher withholding. Ask your employer if you have the option to choose the method that best fits your situation.
5. Coordinate Across Multiple Jobs. If you or your spouse have more than one job—or have changed jobs during the year—verify that the individual tax withholding from each job reflects your combined income. You can submit an updated Form W-4 to adjust your withholding for these situations.

While estimated tax payments are not necessarily complicated, they do require attention and planning. With some adjustments and monitoring, you may be able to reduce stress and avoid the hassle of estimated tax payments altogether.