Most high earners get estimated taxes wrong. They either underpay and face penalties, or they massively overpay and tie up cash they could’ve been using all year.
Here’s how to get it right—and stop leaving money on the table.
Who Needs to Pay Estimated Taxes?
If you’re receiving a W-2 with consistent withholding that fully covers your tax liability, you may not need quarterly payments. But if you fall into any of these categories, estimated taxes are likely required:
Self-employed business owners: No one is withholding taxes for you. You’re responsible for income tax and self-employment tax throughout the year
Tech employees with RSUs: Most companies (including Amazon and Microsoft) withhold federal taxes at the flat supplemental wage rate—currently 22% up to $1 million. If you’re in the 32%, 35%, or 37% bracket, 22% withholding likely leaves a shortfall
Partners receiving K-1 income: Your K-1 income doesn’t have withholding. Add phantom income and shifting capital accounts, and quarterly planning becomes critical
Anyone with rental income, investment income, or side businesses: The IRS expects tax to be paid as income is earned—not just in April
The rule: If you’ll owe more than $1,000 in taxes after withholding, you need to make estimated payments.
The Safe Harbor Rule (Your Best Friend)
The IRS “safe harbor” rule protects you from underpayment penalties—even if you end up owing in April—provided you meet one of these thresholds:
You’re safe from penalties if you pay the lesser of:
- 90% of your current year’s tax liability, OR
- 100% of last year’s tax liability (110% if your prior year AGI exceeded $150,000)
Why this matters: You can use last year’s total tax as your baseline. Even if you make more this year, paying 110% of last year’s tax generally protects you from penalties.
Example: Last year your total tax liability was $160,000. This year, you’re projected to owe $185,000. As long as you pay in $176,000 (110% of last year) through withholdings and/or estimates, you’ll avoid penalties. You’ll still owe the remaining $9,000 in April—but without underpayment penalties.
That flexibility is powerful for high earners with volatile income.
When Estimated Taxes Get Complicated
For Tech Employees with RSUs
RSU income is taxed at vest—not grant. And withholding is often insufficient. Withholding is treated as paid evenly throughout the year, even if most of it occurs in November. Estimated payments, however, are credited based on when they’re actually paid.
That means increasing W-2 withholding late in the year can sometimes be more effective than making a late Q4 estimated payment.
Strategy: Run vest projections before major vesting months. Consider adjusting Form W-4 withholding if needed. Use safe harbor early, then refine Q3 and Q4.
For Partners
K-1 income is unpredictable. Distributions may not match taxable income. Phantom income can create tax without cash.
Strategy: Use the 110% safe harbor in Q1 and Q2. Recalculate after mid-year partnership updates. Adjust Q3 and Q4 payments based on actual projections
For Business Owners
Revenue fluctuates. A strong Q2 doesn’t guarantee Q3.
Strategy: Track net profit monthly. Recalculate year-to-date tax quarterly. Adjust estimates based on actual performance—not optimism
What to Do Right Now
If you’re underpaying: Calculate your shortfall and increase remaining payments to reach the safe harbor threshold. The earlier you adjust, the smaller the penalty exposure.
If you’re overpaying: Reduce future estimated payments (as long as you remain within safe harbor). That cash can be invested or deployed strategically instead of sitting with the Treasury.
If you’re not sure: Pull last year’s tax return. Multiply your total tax by 110%. Subtract expected withholding. Divide the remainder across quarters. That’s your penalty-proof baseline.
Why This Requires Coordination
Your CPA can tell you what you owe in April. But managing estimated payments throughout the year requires someone watching your income in real-time.
When RSUs vest, should you make a larger Q4 payment or increase withholding? When your law firm announces a special August distribution, how does that change your Q3 estimate? When your business has a record Q2, does Q3 need adjusting?
At KFA, we monitor your income throughout the year—RSU vests, K-1 projections, business performance—and coordinate with our team of CPAs to proactively adjust estimated payments before penalties (or overpayments) occur.
Ready to stop guessing at your estimated taxes? Schedule a complimentary tax planning review. We’ll discuss ways to avoid penalties while keeping your capital working for you all year.
Stop overpaying. Stop getting surprised. There’s a better way.
The opinions expressed herein are those of KFA Private Wealth Group and are subject to change without notice. KFA reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. The information provided is for educational and informational purposes only and should not be considered investment advice or an offer to sell any product. Past performance is no guarantee of future results. This contains forecasts, estimates, beliefs and/or similar information (“forward looking information”). Forward looking information is subject to inherent uncertainties and qualifications and is based on numerous assumptions, in each case whether or not identified herein. It is provided for informational purposes only and should not be considered a recommendation to buy or sell securities or a guarantee of future results. KFA is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about KFA, including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.
