How to stay safe when making extension payments

The IRS wants to be paid as soon as you are paid. In 1943 FDR signed into law the Current Tax Payment Act which required employers to withhold federal income tax from worker’s paychecks and remit it to the IRS.

If you are your own boss, the IRS requires you to withhold from you in the form of Quarterly Estimated Tax Payments.

These should reflect what you will owe for the current year based on your earnings for the quarter to date, and they should be filed timely!

So how should you calculate that?? There are two ways we recommend:

  1.  Run the same calculation that we ran for your extension payment. Use the best numbers, best guesses for the quarter and the year and annualize what your taxes will be. Then pay that to the IRS each quarter.
  1.  Use the Safe Harbor Method. This allows you to pay 110% of your prior year taxes as quarterly estimated payments for the current year. This means if you win the 1 BB PowerBall in 2022, so long as you pay in 110% of your 2021 tax burden you will not owe any taxes until April of 2023, when you will owe 100% of your 2022 tax burden and 25% of 2023.


This is a great method to use when your income and business are growing, as it allows you to hang on to your cash and easily remain compliant.

If your business is flat or the laws change significantly the whole calculation might need a sharper pencil.