Understanding Estimated Taxes & Safe Harbor (A Simple Guide for 2025)
Many people end up with IRS penalties simply because they don’t know how estimated taxes work. This short guide explains the idea in plain English and shows you how Safe Harbor can protect you as long as you pay what you paid last year.
What are estimated taxes?
Estimated taxes are payments made during the year on income that doesn’t have automatic tax withholding. If you get a W-2, your employer handles withholding. But if you earn money through other sources, the IRS expects you to pay as you go. This can include things like freelance work, consulting or self-employment, investment gains, crypto transactions, selling collectibles, rental income, or K-1 income from partnerships.
If nothing is being withheld, the IRS wants you to pay your taxes throughout the year, not all at once.
Safe Harbor — the simplest rule to avoid penalties
Here’s the easiest way to understand Safe Harbor: if you pay at least what you paid in taxes last year, the IRS won’t penalize you this year. That’s the whole idea. The IRS gives two versions of this rule:
- If your income last year was below $150,000, pay 100% of last year’s tax.
- If it was above $150,000, pay 110% of last year’s tax.
As long as you reach that number through withholding or estimated payments, you’re covered, even if your income changes.
Why do people usually get penalties?
Most penalties happen because people had income that wasn’t withheld, such as a big bonus, stock sales, crypto gains, partnership K-1 income, a spike in business income, or a second job or side income. They wait until filing time, but the IRS wanted the tax during the year.
A simple way to check where you stand
Here’s a quick way to know if you’re on track:
- Look at last year’s total tax.
- Add up how much you’ve already paid this year (withholding + estimates).
- If the number is lower than last year, you may need an estimated payment.
- If your income is lower this year, that’s great — you may not need any additional payments.
Final Thoughts
Estimated taxes are not complicated once someone explains them in everyday language. The Safe Harbor rule is simply a way to stay out of trouble: match last year’s tax, and you’re protected. If you’d like help checking your numbers or want to know whether you need a payment this quarter, I’m here to walk you through it.