When attempting to estimate your income tax for the year ahead, you are predicting the future. If you underestimate, you may be penalized for the number of days it remains unpaid, said Thomas Jensen, a financial planner based in Portland, Oregon. The simple way to ensure that you pay what you owe, Jensen said, is to pay at least 100 percent of the tax you paid the previous year, unless you have some indication you are going to earn significantly less.
“If you think you are going to make less, calculate about how much and try to pay 90 percent,” Jensen said.
If you pay 100 percent, and still owe a little more at the end of the year, that’s OK, Zinman said.
Jensen offers an example of a "safe harbor payment" — a payment that ensures you will not be penalized. If you are married, filing jointly and your adjusted gross income is below $150,000 (or below $75,000 if you are single or married and filing separately), you may make a payment equal to 100 percent of what you paid in income taxes the previous year or 90 percent of the tax for the current year. Taxpayers whose adjusted gross income is $150,000 or more must make a payment equal to 110 percent of the previous year’s taxes or 90 percent of the tax for the current year.
In either case, you will still owe taxes at the end of the year, but you will not face penalties and interest.
The IRS provides a worksheet for Form 1040 ES. It instructs taxpayers how to estimate their taxes. It can get very confusing, says Tim Clegg, a Boston-based financial coach and retired tax advocate.
“The 1040 ES instructions have elaborate standards, and I generally tell people not to get all hung up on that,” Clegg said. “Just figure out a best guess of what you owe and send it in.”