Can I estimate taxes using paycheck?

[mellynlee]

We have usually paid our estimated taxes by calculating 110% of the previous year's taxes, and making sure we pay that same amount. However, last year we sold a large amount of stock, and therefore owe a lot of taxes for 2024. So to try to avoid penalties for 2025, I want to try to pay at least 90% of this year's taxes. Can I do this by looking at our paycheck?

The idea was to add the RSU + Salary on 3/31/25 paycheck, and calculate 35% of this amount. Compare it to the YTD Fed Income Tax paid, and if income tax paid is less, make an estimated tax payment of the difference.  

Is this an acceptable way of estimating taxes?

Do I need to account for the "Employer HSA Contribution" or "Group Term Life" which is also listed under the Earnings portion of the paycheck?

We always receive 1099-s for interest and dividends as well...should I add the amount received by 3/31 to the above salary+RSU amount? Or can I wait until the end of the year to add the yearly amounts?

Most all of our income is from this paycheck, which is a salary and RSU stock vested quarterly. The company takes out 22% of the stock for taxes, but we are in a higher tax bracket. We usually take the standard deduction. 

Or if there is an easier way to calculate this in TT, let me know.

[JohnB5677]

There are some flaws in your process.

• The easiest way to do this is to allow TurboTax to make the calculation. 
• You can exclude the stock sale from it, but include the 1099 income.

You can prepare estimated taxes for next year.

Start on the left sidebar menu

1. Under Federal
2. Select Other tax situations
3. On the center drop down select Form W-4 and Estimated Taxes
4. Adjust How Much Tax You Pay - No
5. Estimated Taxes for 2025 - Prepare Now
6. Continue the interview.

TurboTax can calculate next year's federal estimated taxes?

Also see the IRS Website Make a payment

[mellynlee]

Thank you for your suggestion. However, I'm not sure how I can estimate my future RSU income. I have no idea how much RSU income will be added each quarter when it vests, as the stock is volatile. So, on the first page where it asks me to estimate our Wages, I cannot give a good estimate since the wages is equal to Salary + RSU.

How do I account for the RSU income using TurboTax to find my estimated taxes?

[fanfare]

", as the stock is volatile."

in this case, you are back where you started.

You are stuck with the prior year's tax rule, which is unfortunately ( or maybe not)  going to be high.

[fanfare]

each quarter your withholding and estimated tax paid must be at least 25% of the Required Annual Payment, even if your income is uneven,

[mellynlee]

I know for sure that our last year's income will be MUCH higher than this year's income. So, I definitely don't want to use the 110% of last year's tax method.

Can you explain the flaws of my method from my original post?

From the 3/31 paycheck, if I add my salary + income from RSUs, I get a number. If I take 35% of this number, I find it is much higher than the Fed Income Tax that has been withheld YTD.

I would estimate that I can pay this difference as my 4/15 estimated tax.

Can I then do the same with my 5/31 paycheck?

What am I missing in these equations?

Thank you!

[mellynlee]

I tried the TurboTax way of estimating my 2025 taxes, and it stated that I would not owe any estimated taxes. I gave TT the same income as this year (minus the capital gains), even though our income will probably be less this year.

However, as mentioned in my last post:

From the 3/31 paycheck, if I add my salary + income from RSUs, I get a number. If I take 35% of this number, I find it is much higher than the Fed Income Tax that has been withheld YTD.

I would estimate that I should pay this difference as my 4/15 estimated tax.

Is there something wrong with this method of estimating? Since we are vesting RSU's quarterly, this is being added to our income, and only 22% is being taken out. (I am estimating we will be at 35% withholding).

Can someone explain a good way to estimate my taxes by the 90% rule, and explain why my method will not work? Thank you!

Tagging @PatriciaV  and @JohnB5677 as they have helped me in the past.

[fanfare]

Once you have a way to estimate with some confidence of success, 90% of that is your Required Annual Payment.

Avoiding penalty will depend on the accuracy of your projection.

You can compensate by overestimating.

@mellynlee 

[baldietax]

so basically you're estimating as you go and your estimated tax payments will be variable based on that.  I also saw a comment you are leaving payment for the cap gains to the end which could be an issue.

the main thing to be aware of is that the underpayment is assessed quarterly and by default the process assumes that your total income was earned evenly through the year so that 90% safe harbor amount is divided by 4 and the estimated payments to meet that amount should also be evenly paid each quarter - and note that estimated tax deadlines are not quite quarterly - Q2 is 2 months and Q4 is 4 months, but the amounts should still be a quarter.

So let's say you end up owing 20k taxes total for 2025.  The safe harbor 90% is 18k.  For no penalty you would need to pay 4500 every month and the remaining 2k balance with your return in April 2026.  If you end up paying 4000, 4000, 5000, 5000 then you will have met the 'safe harbor' total amount for the year but will have an underpayment penalty for Q1+Q2 that cannot be fixed by an overpayment in Q3+Q4.  However an overpayment in Q1+2 will roll forward and eliminate an underpayment in Q3+4.

If you have a significant tax event causing you to pay higher Q4 etc you can use Form 2210 Annualized Income method to specify the uneven income and payments to eliminate the penalty (and need to do same on state) but this can be a lot extra work and I would only suggest using this for some significant unplanned tax event like a Roth conversion or large cap gain.  I ended up having to do it for 2024 due to a Roth conversion and plan to avoid in 2025.  The AI method is not quite quarterly, it looks at your income thru 3/31, 5/31, 8/31 and 12/31 to line up with the ES dates.

If looking to avoid the AI method, from what you've described your method may be susceptible to underpayment in earlier quarters if it doesn't take into account your full income for the year (e.g. cap gains), and also beware in Q2 you will likely underpay if you just base it on May paycheck instead of June - you will be a month short on your Q2 ES (tho using 5/31 would be correct if planning to adopt the Annualized Income method).

Rather than paying variable ES as you go, you may want to take a stab at estimating your full year income and safe harbor amount based on some sort of average income for the RSUs and cap gains, err on over-estimating, and then make even estimated tax payments based on that.  You can always adjust the estimated tax payments lower later in the year if your running estimate then comes in lower than you planned.

Not a CPA/Expert but hope this explanation helps think thru options and potential issues.

[mellynlee]

OK, I think I understand what you are saying.

I tried re-estimating using the TT interview to calculate estimated tax payments. I padded some numbers (just in case), and asked it to calculate 100% of my tax (instead of 90%).

It came up with an amount for all 4 payments = X

As mentioned in my earlier post, from our 3/31 paycheck, I calculated that the current federal tax withheld was not 35% of the current salary+RSUs. The difference in the amounts is Y.  However, Y is only off by about $3k from the above TT estimate of X. (X+$3K = Y)

From what you are saying, in your above example, if I made quarterly payments of 4000, 4000, 5000, 5000 I would have had an underpayment penalty from Q1 and Q2. However, if I paid 5000, 5000, 4000, 4000, then I would not have any penalty, correct?

So it is to my advantage (if I can't estimate equal payments), to make higher payments in Q1 and Q2, and I can adjust lower as the year goes on, if I know I will be overpaying taxes.

And to avoid penalties, I should overestimate, rather than underestimate.

Am I right to assume that my calculation of this first quarter taxes (using salary+RSU)  is correct? We did not have any capital gains this quarter. Do I need to add in any dividends or interest earned in this quarter as well, or can I assume the interest/dividends are added at the end of the year.

If the above is correct, can I use my calculation of Y as my quarterly estimated tax payment?

[baldietax]

to illustrate the example, I did a quick mock up in TT based on an 18k safe harbor with the Q1-2 underpayment showing the penalty and Q1-2 overpayment showing no penalty, see below.  so yes if you overpay earlier in the year and meet safe harbor by the end of the year you will not have a penalty.

At the end of the day it all depends how material any underpayment errors are - in the example above the penalty is $40; even tho the underpayment rate is 8% the underpayment is extinguished by the overpayment within a couple of quarters which stops the penalty from accruing.

re your calculation it sounds like you have a good handle on the salary+RSU whether it's X or Y they sound close; but if you leave interest/dividends/cap gains until the end and didn't include that in your estimation as you go, then you could end up with larger payment needed in Q4 and back to either a penalty or using Form 2210 AI method to reduce it.  Again depends how material this is vs. X or Y.  Personally I take a stab at estimating this for the year, include that in ES payments quarterly and then review later in the year.

Underpayment penaltyNo penalty

[mellynlee]

OK, I will take a look to see if we have any dividends/interest this quarter, and calculate that into my estimate as well. I think I will just have to try it and see what happens. I will err on the higher side, so I can readjust later if needed. 

Also, if I find that I had underestimated as the year goes on, I believe we can take more $ out of our paycheck, and it will be the same as having the extra $ "equally distributed", correct?

Thank you for all of your help!

[mellynlee]

Also, regarding interest and dividends...I noticed that the TT interview (for estimated taxes) just asks for an amount that I think we would earn in 2025. If I enter the number there, isn't that sufficient? I don't need to try to calculate the amount of interest and dividends I earn each quarter, do I?

Thanks!

[DianeW777]

Yes, extra withholding from your pay check will be considered as paid evenly throughout the year regardless of when it was withheld.

Yes, that is sufficient. If you feel confident in the annual amount entered when using the 2025 estimated calculation you should be good unless you have an unexpected sizeable increase at some point in the tax year. If so, consider that when making an estimated payment for that specific period.

@mellynlee