The estimated payment problem

If you made estimated tax payments based on a projected income that turned out to be too low, you may have underpaid. The IRS generally expects you to pay at least 90% of your current year's liability, or 100% of the prior year's liability (110% if your prior year AGI exceeded $150,000). If you fall short of these thresholds, you may owe an underpayment penalty — even if you pay the full balance when you file.

The penalty is calculated separately for each quarter, so catching the problem mid-year and correcting it in the third or fourth quarter payment can reduce — but not eliminate — the penalty for earlier quarters. Still, correcting it as soon as possible is better than waiting until April.

Year-end planning options that may still be available

Depending on when you identify the income increase and what your business situation looks like, several planning options may still be available before year-end.

• Retirement contributions. If you have a SEP-IRA, Solo 401(k), or other business retirement plan, you may be able to make a larger contribution than originally planned. Contributions reduce your taxable income dollar-for-dollar. The contribution limits for business retirement accounts can be substantial — a CPA can help you determine the maximum allowable contribution for your situation.
• Equipment and business purchases. If you have been considering a business equipment purchase, making it before year-end may allow you to deduct it in the current year under Section 179 or bonus depreciation rules. The purchase needs to be placed in service during the tax year to qualify.
• Prepaying deductible business expenses. In some cases, prepaying certain business expenses before year-end can accelerate deductions into the current year. This depends on your accounting method and the nature of the expense.
• Adjusting estimated payments. Making a larger fourth-quarter estimated payment can reduce the underpayment penalty for that quarter, even if earlier quarters are already locked in.

The bookkeeping connection

None of this is possible if you do not know where your income stands. Business owners who maintain clean, current books can identify an income increase mid-year and respond to it. Business owners whose books are months behind may not discover the problem until tax preparation begins — at which point most planning options are gone.

This is one of the most practical reasons to keep bookkeeping current throughout the year. It is not just about having accurate records at tax time. It is about having the information you need to make decisions while there is still time to make them.

Common mistakes

• Not reviewing year-to-date income until Q4 or later, when most planning options have closed.
• Assuming that a strong year will "work itself out" at filing time without any mid-year adjustment.
• Missing the Solo 401(k) establishment deadline — the plan must be set up by December 31 of the tax year to allow contributions for that year.
• Making equipment purchases in January when a December purchase would have provided a current-year deduction.
• Not increasing estimated payments after identifying the income gap, resulting in a larger underpayment penalty.

What to do next

If your business is tracking ahead of projections, the most useful step is to get a current-year tax projection as soon as possible. That projection will tell you how much additional liability you are looking at, whether your estimated payments are on track, and what options are still available before year-end.

The earlier you have that conversation, the more options you have.