May 5th, 2025
The US income tax system is a “pay-as-you-go” system, which means the IRS expects individuals to pay taxes on income as they earn it, not all at once at the end of the year. If you have insufficient withholdings and/or estimates paid in, you may trigger interest and penalties in addition to tax due when the return is filed.
How do I check and adjust withholdings?
The most effective way to check your withholding is through the IRS Tax Withholding Estimator. This online tool walks you through a few easy steps and then tells you if you’re likely to get a refund, owe money, or break even under your current withholding. It will also give specific instructions on how to fix it. If the estimator recommends a change, you can update your Form W-4 with your employer at any time.
Key W-4 sections are:
- Step 3: Claim dependents (if eligible)
- Step 4(a): Add other income not from jobs
- Step 4(b): Add deductions beyond the standard
- Step 4(c): Enter extra withholding per paycheck if needed
You’ll need:
- Your most recent pay stub
- Last year’s tax return
- Info on other income (freelance, investments, etc.)
You should also recheck your withholdings anytime you experience major life or income changes, such as:
- Marriage or divorce
- New job or side income
- Having or adopting a child
- Losing a dependent
- Buying a home or taking on large deductions
Estimated taxes; when, why and how much?
Estimated taxes are quarterly payments you make directly to the IRS to cover income that isn’t subject to automatic withholding. This includes self-employment income, interest and dividends, capital gains and business income.
The IRS generally requires you to make estimated tax payments if you expect to owe at least $1,000 in Federal tax after subtracting your withholding and refundable credits and your withholding and credits will be less than the smaller of:
- 90% of your total tax for the current year, OR
- 100% of the tax shown on your prior year’s return (110% if your prior AGI was over $150,000)
Estimated taxes are due four times a year: April 15th, June 15th, September 15th and January 15th in the following year. If the due date falls on a weekend or holiday, it’s pushed to the next business day. There are two main ways to determine how much to pay:
- Safe Harbor Method
Use last year’s tax liability and divide it by four. This ensures you avoid penalties as long as:- You pay 100% of last year’s tax (or 110% if prior year AGI exceeds $150,000)
- Payments are made evenly each quarter
- Actual Income Method
Estimate your actual income and deductions for the year. More accurate but requires ongoing tracking and adjustments.
You can pay your estimated taxes:
- Online at irs.gov/payments
- Through the IRS2Go mobile app
- By mailing Form 1040-ES with a check
- Through IRS Direct Pay or EFTPS for businesses
If you also have a job with tax withholding, you may be able to increase your W-2 withholding to cover other income instead of making estimated payments. This is often easier and avoids the need to track quarterly deadlines.
The information provided in this article is intended for general informational purposes only and does not constitute tax advice. Tax laws are complex and subject to change. We strongly recommend consulting with a qualified tax advisor to discuss your specific situation before making any decisions based on the information provided.