Are California estimated tax requirements cumulative? (If I overpay Q1 and Q2, do I still have to pay 30% Q4?)

[antequ]

Hi,

I have upcoming variable CA sourced income in 2024 that I cannot withhold on (no more W2 CA income), and I'm trying to satisfy the CA requirements for estimated tax. Suppose, the income needs $500 more tax to CA per month, but it can increase or decrease in Q2, Q3, and Q4. Projecting this for the year, if my income remains the same I'd need to pay $6000 total tax, split $1800 in Q1 (30%), $2400 in Q2 (40%), and $1800 in Q4 (30%).

I think the safest way for me to deal with the variable income is to overpay in Q1 and Q2 based on a highest-case assumption (e.g. assuming the income doubles later this year), and then correct in Q4 if the income is lower than expected. That is, I plan to pay $2200 in Q1 and $2600 in Q2, and in Q3 and Q4 catch up once I know more of the income. In this case, if my income stays the same, could I just pay $1200 in Q4 (to total to $6000)? If I were to read the CA FTB webpage (https://www.ftb.ca.gov/pay/estimated-tax-payments.html), I'd owe a penalty next year because in Q4 I'd need to pay 30% of $6000, but if I were to interpret it instead to say that I need a cumulative 30% by Q1, 70% by Q2 and Q3, and 100% by Q4, then I would be fine as I overpaid Q1 and Q2 to offset this.

Most other threads here say that the Federal estimated tax is cumulative: if you overpaid in Q1 and Q2 you can underpay in Q4 to offset it, and it will be fine. Could someone confirm that CA FTB allows you to treat it cumulatively too, that is, if I overpay Q1 and Q2, then in Q4 I don't need to pay the full 30%?

[Gordon9 · Accepted solution]

You are correct that it is cumulative. You can always pay higher at the beginning and lower at the end. The fact is that paying estimated tax is just that, an estimate of what you will owe for the year. It may end up being not accurate if your income is variable, but the main reasons for estimated payments are that you don't have a huge payment to make all at once next year, and you avoid paying PENALTY and/or INTEREST charges. There are "safe harbor" rules for California estimated payments so that you can avoid a PENALTY. However you could be charged INTEREST if you don't pay estimated payments quarterly, on time, as calculated (or higher). Here are the safe harbor rules;

Generally, taxpayers can avoid paying California penalties for underpayment of estimated taxes by paying the lesser of the following:

1. 90% of the current year's tax
 or
2. 100% of the preceeding year's tax

But high income taxpayers must meet some different standards as listed below:

1. When current year AGI exceeds $150,000 ($75,000 if married filing separately) but is less than $1,000,000 ($500,000 if married filing separately), they must pay in 110% of the prior year's amount to avoid the penalty.  

2. Individuals with annual AGI of $1,000,000 or more must pay in 90% of the current year's tax to avoid a penalty.