It’s that time of year – second quarter estimated tax payments are due June 16, 2025 (you get an extra day as a result of the 15th falling on a weekend!)

I talked with a client this week about adjusting tax payments mid-year (due to a change in business earnings). It’s a great question that involves revisiting the concept of safe harbor.

Safe Harbor Refresher

We’ve written about safe harbor (as it relates to taxes) in the past. For a full rundown, please revisit that post. But at a high-level, if you have variable income and/or no withholding mechanism via your employer/payroll, you must make estimated federal and state (if applicable) income tax payments throughout the year. Since your ending income is unknowable, you are allowed to make good faith estimates (and true that up upon filing). Those estimates (known as safe harbor payments) must equal the lesser of:

Current year method: pay in at least 90% of the tax you think you will owe for the current year OR

Prior year method: pay in 100% of the tax you owed for the previous tax year (this increases to 110% if your prior year adjusted gross income was over $150,000 married/$75,000 married filing separately or single)

Also: Keep in mind that your state may have its own set of safe harbor rules.

Adjusting Mid-Year

As you can see based on the rules above, you do have choices when it comes to reaching safe harbor. Most individuals opt to pay in based on the prior year as that is the “safest” approach. Why? Simply because it is a knowable amount. You know what the prior year taxes were so you can calculate the amount due (either 100% or 110% of that amount) and pay that in over the year.

What can be done if you observe a marked change in income in the middle of the year? It depends on the direction of the change. If you believe your income will be higher in the current year, there’s nothing you need to change regarding your estimates. If you continue to pay in based on the prior year, you will retain “safe harbor” and will pay the extra tax balance due upon filing your taxes (just ensure you reserve that cash someplace!)

However, if your income has declined sharply, you may wish to consider moving to the current year safe harbor approach. It’s worth completing some calculations and verifying that you are certain that 90% of current year taxes will be less than 100% (or 110%) of prior year. Income – especially business earnings – can change month to month, so you need to do some serious calculations before you decide to abandon your scheduled estimated payments. But if there has been a sharp decline and cash flow has declined as a result, adjusting is certainly worth considering. As always, work closely with your financial and tax advisor before skipping payments or adjusting them downwards.

Tax payments are never easy to stomach – but it’s even harder to pay MORE than what you owe due to penalties and interest. As a result, keep a close eye on your estimated payments and work closely with your advisors before making any adjustments.