- Taxes must be paid as income is earned through withholding or estimated payments even when an installment agreement covers older debt.
- Individuals generally must make estimated tax payments if they expect to owe $1,000 or more at filing.
- Underpayment penalties can apply if current year taxes are not paid on time regardless of prior year arrangements.
- Safe harbor rules allow avoidance of penalties by paying 90 percent of current year tax or 100 percent of prior year tax.
For background on this issue, read our IRS payment plans guide.
Pay As You Earn Requirement
Federal tax rules require that income taxes be paid during the year as income is earned or received. This occurs through withholding from wages or pensions or through estimated tax payments for other income such as self employment earnings, interest, dividends, capital gains, or prizes.
Self employed individuals, partners, and S corporation shareholders generally must make these payments. The payments cover income tax as well as self employment tax and alternative minimum tax when applicable.
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Failing to pay enough through withholding or estimated payments during the year can result in an underpayment penalty even if a refund is due at filing time.
Estimated Tax During Installment Agreements
An installment agreement allows extended payment of a past due tax balance. Interest and penalties continue to accrue on any unpaid amount until it is paid in full.
The agreement covers a specific prior balance and does not change the separate obligation to pay taxes on current year income as it is earned. Current year taxes must be handled through withholding or estimated payments on the normal schedule.
Not paying current obligations on time can create a new balance subject to its own interest, penalties, and collection processes.
Who Must Make Estimated Payments
Individuals including sole proprietors, partners, and S corporation shareholders generally must make estimated tax payments if they expect to owe at least $1,000 when their return is filed.
Corporations generally must pay if they expect to owe $500 or more. A person may also need to pay estimated tax for the current year if tax was owed in the prior year.
Those who had no tax liability for the prior year, were U.S. citizens or resident aliens for the full year, and had a 12 month prior tax period do not need to make estimated payments.
Taxpayers with wages can increase withholding on a new Form W 4 instead of making estimated payments.
Calculating and Paying on Time
Form 1040 ES provides a worksheet to figure estimated tax using expected adjusted gross income, taxable income, taxes, deductions, and credits. Prior year returns can serve as a starting point for these estimates.
The tax year has four payment periods with specific due dates. Payments can be adjusted quarterly if income estimates change. They may be sent by mail with Form 1040 ES, paid online, by phone, through the IRS app, or via an online IRS account.
Most taxpayers avoid the underpayment penalty if they owe less than $1,000 after withholdings and credits or if they have paid at least 90 percent of the current year tax or 100 percent of the prior year tax, whichever is smaller. Special rules apply for farmers, fishermen, and certain higher income taxpayers.
IRS guidance checked .
General information only, not individual tax, legal, or financial advice. Rules, deadlines, and eligibility depend on your circumstances. Check current official guidance or consult a qualified professional.
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