As 2025 comes to a close, one of the most overlooked — but important — financial tasks is year-end estimated tax planning. Whether you are self-employed, a small business owner, or someone with investment income, taking time now to review your estimated taxes can help you avoid costly IRS penalties and manage your cash flow more effectively.
Why Year-End Estimated Tax Planning Matters
If you expect to owe tax that is not fully covered by withholding, reviewing your numbers before December 31 is critical. The IRS can charge underpayment penalties even if you pay the full amount due by April 15, 2026 — simply because your payments were not made evenly throughout the year.
By calculating your year-end tax position, you can make a final estimated payment or adjust your withholding now to stay in the safe zone.
Who Needs to Pay Estimated Tax
You generally need to make estimated tax payments if you expect to owe at least $1,000 in tax for 2025 after subtracting withholding and refundable credits, and your withholding and credits will be less than the smaller of:
- 90 percent of the tax shown on your 2025 return, or
- 100 percent of the tax shown on your 2024 return (110 percent if your 2024 adjusted gross income was over $150,000, or $75,000 if married filing separately).
When Estimated Payments Are Due
Estimated tax payments are divided into four installments:
- April 15, 2025
- June 16, 2025
- September 15, 2025
- January 15, 2026
If your income comes in unevenly during the year — for example, from a year-end bonus or seasonal sales — you may be able to use the annualized income installment method to align payments with when you actually earn income. This can help reduce or eliminate penalties.
How to Calculate Your Estimated Tax
To get an accurate estimate, project your 2025 income, deductions, and credits as closely as possible. Use the IRS 2025 Estimated Tax Worksheet (Form 1040-ES) or consult your tax professional. Include all sources of income, such as self-employment, investment earnings, rental income, and retirement distributions.
Example 1: Safe Harbor Rule
If your 2024 total tax was $20,000 and your 2025 adjusted gross income is under $150,000, paying at least $20,000 in total withholding and estimated tax for 2025 will keep you penalty-free — even if you owe more at tax time.
If your 2024 AGI was over $150,000, you must pay at least $22,000 (110 percent of $20,000) to stay within the safe harbor.
Example 2: Annualized Income Method
If most of your income arrives later in the year, such as in the fourth quarter, you can make smaller estimated payments earlier and larger ones later, matching your actual income pattern and improving cash flow.
How to Adjust Your Payments
There are two main ways to fix an underpayment before the year ends:
- Increase your withholding:
If you receive wages or pension income, you can file a new Form W-4 or W-4P to increase your withholding. Withholding is treated as paid evenly throughout the year, which can help eliminate penalties.
- Make an additional estimated payment:
If you are behind on estimated payments, you can make a catch-up payment by January 15, 2026. Alternatively, you can file your return and pay the balance by January 31, 2026, to avoid a penalty for the fourth quarter.
What If You Miss a Payment or Underpay
If you do not pay enough tax through withholding or estimated payments, the IRS may charge a penalty for each period underpaid. The penalty is based on the amount of underpayment, the length of the underpayment period, and the current IRS interest rate.
Special Situations
- Farmers and Fishermen: If at least two-thirds of your income is from farming or fishing, you can pay your entire estimated tax by January 15, 2026, or file and pay by March 2, 2026, without penalty.
- Disaster Relief: If you live in a federally declared disaster area, you may qualify for extended payment deadlines. Check current IRS updates for your region.
Action Steps for Year-End
- Review your income and withholding for 2025.
- Estimate your total tax liability and identify any shortfall.
- Make an additional estimated payment before January 15, 2026, if needed.
- Consider adjusting your withholding for the rest of the year.
- Talk to your tax advisor about using the annualized income installment method if your income varies throughout the year.
The Bottom Line
Proactive year-end tax planning helps you avoid IRS penalties, manage cash flow, and stay ahead of surprises.
If you are unsure how much to pay or whether you qualify for safe harbor protection, contact our office for personalized guidance. Our team can review your current tax position, calculate your estimated payments, and help you end 2025 on solid financial ground.
