Estimated Taxes and Withholding – What to Pay and When

Federal and Alabama taxes are collected on a pay-as-you-go system, either through withholding or estimated taxes.

Do You Need to Pay Estimates?

If your income is mainly from wages and you always have a substantial balance due at tax time, increase withholding and pass on making estimates. Otherwise consider if the following applies to you:

  • Self- employed individuals with who expect to owe more than $1,000
  • Individual with substantial investment income not covered by withholding such as rents, capital gains interest and dividends.
  • Those with ownership in pass through entities such as partnerships and S corporations.

Safe Harbor Based on Prior Year Taxes

You can always play it safe and use the safe harbor to avoid interest and penalties. How do you get there? Pay the lessor of either:

  • 90% of current year tax through withholding and/or estimates. The estimates would need to be paid in throughout the year. This works best if you are able to make a reasonably accurate estimate of taxable income.
  • 110% of prior year tax or 100% if adjusted gross income for prior year is less than $150,000 (married filing jointly). This works well if you expect a big increase in current year income. To avoid penalties, use the safe harbor then pay any remaining balance due by the filing deadline or with extension.

If Income Fluctuates Consider Annualization

If your income fluctuates during the year or maybe you have a large, unexpected capital gain, annualization may be the solution. This method allows you to avoid penalties by “paying as you go”. Say you have a large capital gain on December 1st, you simply include the required payment in the 4th quarter estimate. Basically, you’re not required to make the estimate until the income is earned or capital gain realized.


2023 Quarterly Estimated Tax Due Dates

Income Earned                                           Estimate Due Date

Jan 1 – Mar 31, 2023                                 April 18, 2023

April 1 – May 31, 2023                             June 15, 2023

June 1 – Aug 31, 2023                               Sept 15, 2023

Sept 1 – Dec 31, 2024                               Jan 16, 2023


Caution – Penalties Increasing

Beginning January 1, 2023, the penalty rate for individual underpayments will be 7%. For 2021, the rate was 3%. Those content with paying no estimates will paying more than double the penalties on the same amount of income.

Contact your Dent Moses advisor if you have questions.