Filing an extension can save you. Filing it without a payment can cost you. That’s when the IRS starts quietly stacking penalties. The good news is you don’t need a perfect number, but you do need a smart approach. So estimate what to send in, avoid unnecessary penalties, and stay in control of the process.
The IRS expects you to make a reasonable estimate of your tax bill and send it in with your extension. If you don’t, the failure to pay penalty kicks in at 0.5% per month on any unpaid balance, plus interest. That may not sound terrible, and compared to credit card rates it’s not, but it’s still money out of your pocket that could’ve been avoided.
Where people really get burned is when they skip the extension entirely. That triggers the failure to file penalty, which jumps to 5% per month, up to 25%. Even if both penalties apply, the failure to file penalty is still significantly higher. That’s why filing the extension is critical, even if you can’t afford to pay in full.
Here’s how this plays out in real numbers. If you owe $5,000 and file an extension but don’t pay, you might owe around $100 in penalties over a few months, plus interest. If you don’t file the extension at all, that same situation can cost you $1,000 or more.
There are also safe harbor rules that can help you avoid penalties altogether. In general, you can avoid underpayment penalties if you pay at least 90% of your current year’s tax or 100% of last year’s tax, or 110% if your prior-year AGI was over $150,000.
The takeaway is simple. File the extension no matter what, and send in as much as you reasonably can.
You don’t need a perfect number before sending anything in, you just need a reasonable estimate.
One of the easiest ways to estimate your payment is to look at what you paid in total taxes last year, then estimate how much more money you made this year and take about 25% of that increase. Add that to last year’s number and send it in.
For example, if your W-2 job covered everything but you had a side hustle that made a few thousand dollars, you might just estimate that extra income and send in a few hundred dollars with your extension. It doesn’t have to be perfect. You’re just trying to get close and reduce any penalties.
If you want to be a little more precise, look at your tax rate from last year and apply it to your income this year. This is your marginal rate, and it might be less than 25% or more than 25% depending on your situation.
If you know roughly how much you made and how much you’ve already paid in through withholdings or estimates, you can usually figure out within about 30 minutes what you’re likely to owe. This is a more refined version of the 25% method, but still practical.
If you don’t have W-2 withholdings and your income is more straightforward, you can simply look at your taxable income and take about 25% of it as a rough estimate.
This is especially helpful for business owners or contractors who don’t have taxes being withheld automatically. It’s a quick, “down and dirty” way to come up with a number and get something sent in without overthinking it.
There’s also a technical rule that can help you avoid penalties altogether. If you send in at least 100% of what you owed last year, or 110% if your adjusted gross income was over $150,000, you’ve hit what’s called the safe harbor.
That means even if you end up owing more when you file, you won’t be penalized for underpaying. This is one of the simplest ways to eliminate risk if you’re unsure what your final number will be.
If you want the most accurate estimate, you can do a rough draft of your tax return using software like TurboTax or whatever you normally use. You don’t even have to file it yet. Just plug in your numbers and see where you land.
From there, you can send in a payment based on that estimate, then use the extra time after filing the extension to go back, sharpen the pencil, and look for additional write-offs like mileage, equipment, or expenses you may have missed.
There’s another angle here that many business owners overlook. If you’re already making quarterly estimated payments, you can use your extension payment strategically.
Any overpayment you make with your extension can be applied to next year’s taxes. That means you can intentionally send in a little more than you think you owe, create a buffer for this year, and roll any excess forward into your next quarterly payment.
Instead of stressing about being exact, you’re building flexibility into your plan. That’s a much better position to be in.
Federal taxes get all the attention, but state taxes are where a lot of people get caught off guard.
Some states automatically accept your federal extension. Others require a separate filing. Some expect a payment, and the penalties can be more aggressive than what the IRS charges. You can’t assume your state will follow the same rules.
Take a few minutes to look up your state’s requirements. If you’re estimating a federal payment, you should be thinking about your state payment as well. It’s a small step that can save you a lot of trouble later.
This is where small decisions turn into big consequences. If you file the extension but ignore the payment, you’re setting yourself up for penalties. If you take a few minutes to estimate your liability and send something in, you stay in control.
Don’t wait until October to find out you owe thousands plus penalties. Make the estimate, send the payment, and protect yourself now. If you’re not confident in your numbers or you want to make sure your entire tax strategy is dialed in, my team at KKOS Lawyers can help you get ahead of it.
If you’re not ready for a full strategy session, but still want to make sure your return is done right, the Certified Tax Advisor Network can connect you with a qualified advisor trained in the same strategies I teach every day.
Don’t roll the dice with the IRS. Book a free 15-minute call with KKOS or find the right advisor and get it handled now.