Financial Insights

What‘s the deal with estimated tax payments?

When you started your first job, you were probably so happy just to be earning some money that you didn’t question why taxes were being taken out of you paycheck.  The reason why taxes are taken out of your paycheck is because the IRS operates the federal income tax system on a “pay-as-you-go” basis.

The IRS wants to get paid throughout the year, rather than waiting until tax day in April to collect, whether you’re on someone’s payroll, self-employed, or retired and receiving social security, pension and/or investment or other income.

Most states with an income tax operate similarly on a pay-as-you-go basis.

As we mentioned last week, paying too little as-you-go can lead to a tax bill or penalty in April.  Paying too much means that you won’t have use of that money until you file your taxes and receive a refund.

For federal income tax purposes, no penalty will apply if you owe less than $1,000 in tax.  If you expect to owe more than $1,000 in 2023, then you can avoid tax penalties if your 2023 withholding and/or estimated tax payments equal:

  1. At least 90% of your 2023 tax liability or either;
  2. 100% of the tax shown on your 2022 tax return (if your adjusted gross income was < $150,000)
  3. 110% of the tax shown on your 2022 tax return (if your adjusted gross income was > $150,000)

You can avoid a tax penalty and satisfy the above pay-as-you go requirements by either having taxes “withheld” from  your income throughout the year or by making “estimated tax” payments, or some combination of both.


If you are working, then part of the hiring/onboarding process included completing a W-4 form, which determines how much tax your employer will withhold from each paycheck.

You make a selection on the W-4 form based on your filing status (single, married, etc.) and how many “allowances” you want to claim.  The more allowances claimed, the less income tax will be withheld; the fewer allowances claimed, the more tax will be withheld.

How many allowances you should claim depends on your personal situation (how many jobs you have, if your spouse works, if you have children, or if you have other taxable income that you may want to account for, etc.).  There are plenty of calculators available online to help including one through the IRS.  You should complete a new W-4 form whenever your personal financial situation changes (marital or family status, job or income change, etc.) and submit it to your employer.

Tax withholding also comes in handy, for pay-as-you-go purposes, if you are retired and collecting social security retirement benefits, or when you’re taking distributions from any retirement accounts or annuities that count as taxable income.  You can elect to withhold taxes on your social security benefits and retirement distributions so that you’re paying taxes on these income sources when received, which can take some of the guess work out of satisfying the 90%/100%/110% requirements mentioned above in order to avoid a penalty.


If you’re self-employed or don’t have enough taxes withheld from other sources of taxable income (interest, dividends, capital gains, alimony, rental income and social security or retirement plan distributions, etc.), then it’s up to you as the taxpayer to satisfy the pay-as-you-go requirements by periodically making estimated tax payments to the IRS (and typically your state too if it has an income tax).   This can be an entirely new process for folks when they retire after unknowingly relying on the taxes withheld from their paychecks for years.

The first step is to estimate your income for the year (earnings, interest and dividends, capital gains, any other income and social security or retirement distributions as applicable) and any withholding amounts and deductions.  You can look at your 2022 tax return as a general guide, particularly if you expect your income to be similar in 2023.  Then you can make any adjustments as necessary based on what you expect for 2023.

Either you, if self-preparing, or your tax preparer can complete Form 1040-ES to calculate your four estimated tax installments, which are due as follows:

You can pay estimated taxes online, by phone, by check or through the IRS2Go app.  Instructions for each can be found in Form 1040-ES, along with vouchers to include if you are paying by check and mailing in your payments.

You can also alter the above schedule as is appropriate.  For example, if you have no income on which you owe tax  until July, then you don’t have to make an estimated tax payment until September.

If you get a big tax refund for 2022 and apply it to cover all of your expected 2023 tax by April 18, then you can be off the hook for the rest of the year.  If your situation changes during the year, then just like updating the W-4 form for withholding, you can always complete another Form 1040-ES and recalculate your estimated tax payments.  Also, if you file your 2023 return by January 31, 2024 and have paid all taxes that are due, then you don’t have to make the final January 16, 2024 estimated tax payment.

Keep in mind that, if you owe federal estimated taxes, then it’s likely that you owe them to your state too, unless you live in a state with no income tax.  Most states, but not all, have estimated tax payment dates that coincide with the federal due dates.  The process of estimating your income will be similar to the above, however, you’ll need to check with your state for instructions on how and where to make your payments.

We can help you estimate your income for the year, particularly if we have received a copy of your 2022 tax return.   In many cases, your income may be consistent from year to year.  If you change jobs or retire or sell any assets and realize capital gains, then this could mean that your withholdings and/or estimated tax payments need to change as well.  As the year progresses, we can help you adjust your income projection, in the event that changes occur, so that your estimated payments reflect what’s happening and your estimated tax payments are adjusted accordingly.

We are used to getting a lot of questions on income taxes every year and, as we mentioned last week, this is an area where you do have some control once you know how the system works.  As always, if you have any questions, please reach out to your ACM Wealth Advisor.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


Contact Us Today!

    I am interested in

      Investment and Wealth Commentary
      Delivered to Your Inbox Weekly