How to handle making more money than planned, and taxes
Unexpected financial windfalls can be both exciting and intimidating. Making more money than planned can be a good thing when you’re ready to handle it wisely. But it can also be a bad thing if you’re caught off guard by the tax implications
When you make more than expected you might owe more in taxes, including additional estimated quarterly taxes or payments. Understanding the rules and when to pay these taxes helps you stay compliant, avoid penalties and enjoy the benefits of your success without any surprises from the IRS.
You’re (probably) Ok
If you ever underestimated how much you would make compared to last year, you’re not alone. Projections can sometimes be off and that’s completely normal. In these cases it’s important to review the IRS rules on how much you should pay quarterly, especially if your income has fluctuated.
One important rule is the IRS safe harbor rule outlined in IRS Publication 505. This provision helps taxpayers avoid penalties as long as you pay:
- 100% of last year’s total tax liability for income below $150K.
- 110% of last year’s tax liability for income exceeding $150K.
By meeting these thresholds you won’t be penalized — even if you owe more when you file your return.
In addition, if your income increased in the last quarter you might also qualify for an exception to underpayment penalties. By using Form 2210 Schedule AI (Annualized Income Installment) you can demonstrate your lower estimated payments matched your income earlier in the year.
Taxpayers with highly seasonal or irregular income can also use Form 2210 Schedule AI to calculate their estimated taxes based on actual earnings per quarter. This spreads tax liability more accurately across uneven earnings which may help reduce underpayment penalties.
And if this is your first time owing estimated quarterly taxes the IRS may waive penalties under their reasonable cause provision. However, this typically applies to newly self-employed individuals or those who suddenly receive significant investment income.
So, instead of panicking over additional tax responsibilities, next time consider it an opportunity to refine your financial forecasting. By adjusting your projections and planning ahead for your quarterly taxes you can navigate this situation with confidence.
Staying ahead of the IRS
GYL’s professionals are here to help with your personal finances, including taxes, IRAs, 401(k)s, stock portfolios, and other investments. If you’re struggling financially, look no further—our team is ready to review and advise.
The key to managing extra income is to stay proactive about your tax obligations. If you have made more than planned, don’t wait until next year’s April deadline to address the issue. Instead, begin planning for estimated quarterly taxes as soon as possible. Paying taxes on the extra money throughout the year helps distribute the tax burden, making it easier to manage.
Do you own a business in California? Are you a CFO in a certain industry? Whether you are a Corp, Partnership, LLC, or Not-For-Profit, consider accounting services for businesses. GYL’s services ensure accurate reporting on financial statements and compliance with all tax requirements. With new strategies in place, you can stay ahead of the IRS and turn a potentially stressful situation into a manageable part of your financial planning.