Is it optional or mandatory to pay estimated taxes? I pay my taxes in full when I file but received a cp30 letter today.

[k-young-y]

do you have to pay estimated taxes? or can you just pay in full when filing?

[guywong]

We pay estimated taxes to avoid underpayment penalties.  In order to avoid underpayment penalties, a taxpayer must meet a certain criteria, see this IRS link, unless your total federal tax liability is less than a thousand dollars.  The IRS also allows taxpayers to pay estimated taxes based on when the income is received, for those whose income aren't earned evenly during the year.  There are special rules for farmers and fishermen.

Underpayment of estimated tax by individuals penalty | Internal Revenue Service

Taxes are pay-as-you-go. This means that you need to pay most of your tax during the year, as you receive income, rather than paying at the end of the year. The Underpayment of Estimated Tax by Individuals Penalty applies to individuals, estates and trust that don't pay enough estimated tax on their income or you pay it late.

There are two ways to pay tax:

• Withholding from your pay, your pension or certain government payments, such as Social Security.
• Making quarterly estimated tax payments during the year. Estimated tax payments are generally due as follows:
  • Jan. 1 to March 31–April 15
  • April 1 to May 31–June 15
  • June 1 to Aug. 31-Sept. 15
  • Sept. 1 to Dec. 31–Jan. 15 of the following year

Avoid a penalty

You may avoid the Underpayment of Estimated Tax by Individuals Penalty if:

• Your filed tax return shows you owe less than $1,000 or
• You paid at least 90% of the tax shown on the return for the taxable year or 100% of the tax shown on the return for the prior year, whichever amount is less. If your adjusted gross income (AGI) for 2023 was more than $150,000 ($75,000 if your filing status for 2024 is married filing separately), substitute 110% for 100%.

The IRS urges taxpayers to check into their options to avoid these penalties.

• Check your withholding often and adjust it when your situation changes. To do this fill out a new Form W-4 and give it to your employer. The Tax Withholding Estimator is a helpful tool.
• Estimated tax is the method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.). Use Form 1040-ES to figure and pay estimated taxes on time.

[NCperson]

@k-young-y - it is mandatory - if you do not pay quarterly, you are subject to underpayment penalties.  

Pick your poison!

[baldietax]

if you haven't been paying quarterly estimated taxes (see response from @guywong who lays out the details) you can stop the penalty due from Q1-2 accruing further (at 8% annual rate) by paying those portions ASAP, and then pay the quarterly estimated tax for Q3 in Sep, Q4 in Jan.  If your income was uneven and in particular skewed to later in the year (e.g. Roth conversion or large cap gain in Q4) you may be able to pay the ES unevenly to line up with the income and then file Form 2210 Annualized Income method but you will need to calculate your AGI, withholding, qualified dividends, LTCG etc thru 3/31, 5/31, 8/31.

TT generates ES vouchers by default for the following year when you file, based on paying 100/110% of your prior year tax and assuming your 2025 withholding is the same as 2024, but you can also work through an estimate for the following year under Other Tax Situations / Form Q4 and Estimated Taxes to see if paying ES based on 90% of current year is better.

If able, pay ES online at irs.gov don't bother with vouchers and checks.

[Mike9241]

@NCperson i would say they're not mandatory but if a taxpayer doesn't have sufficient withholding they get penalize so the choice is between penalties and paying estimates (if needed). I had clients who preferred to pay the penalties because they "said" they made more income on the extra money they kept to the cover taxes and penalties.  

[VolvoGirl]

You can even have a penalty when getting a refund for not paying in evenly during the year.  Did you have a penalty on your 1040 line 38?   It is just an estimate so it is possible for the IRS to recalculate it and send you a refund or a bill for more. 

Understanding your CP30

https://www.irs.gov/individuals/understanding-your-cp30-notice 

[NCperson]

@Mike9241  if it were "optional", the paying a penalty for not paying quarterly  would not be logical.   

It's mandatory that the taxpayer pay estimated taxes quarterly and there is a  penalty for not doing so.   

It's optional that that taxpayer pay estimated taxes quarterly and there is a penalty for not doing so.

The 2nd sentence is just not logical (and thus poorly written if we'd  ask an English teacher).  If there is an option then why a penalty? Not logical.  

Which sentence makes more sense? 

It's mandatory to stop at a stop sign and there is a penalty for not doing so.

It's optional to stop at a stop sign and there is a penalty for not doing so.

suggest looking up the definitions of "mandatory" and "optional" 🙂

[NCperson]

@k-young-y @VolvoGirl that is correct - you can get a penalty even if you are due a refund! 

That is because the assessment is based on (keeping this simple) the tax liability less the refundable credits.  If that exceeds $1,000, the taxpayer is subject to underpayment penalties. 

 Importantly, the estimated tax payments and the April 15 final payment are NOT part of the assessment.  

suggest closing reading the flow chart in the link below and form 2210. 

https://www.irs.gov/pub/irs-pdf/f2210.pdf