As Benjamin Franklin famously said, “In this world nothing can be said to be certain, except death and taxes.” And if you own your own business or earn income from a partnership, those taxes can be a bit more complicated. The IRS makes you pay taxes as you earn, rather than waiting until April 15^th each year. If you are a traditional salaried employee, this is accomplished through regular tax withholding from your paycheck. On the other hand, if your income is irregular, you need to plan on paying “estimated taxes.” In simple terms, if you are earning enough money that you expect to pay at least $1,000 to the IRS–regardless of if you are an entrepreneur, retiree, partner in a law firm, or an Uber driver–you need to make estimated tax payments. As the IRS tells us, the failure to make estimated tax payments on a quarterly basis can result in a penalty–even if you’re due a refund at the end of the year. The penalty will depend on how much you owe and how long you have owed it to the IRS.

How do estimated tax payments work?

First off, it might be possible you don’t have to pay estimated taxes. But you need to meet all three of these criteria:

• You had no tax liability for the prior year.
• You were a U.S. citizen or resident for the whole year.
• Your prior tax year covered a full 12-month period.

If that describes you, congratulations. (Different rules apply to fishermen and farmers as well.) Otherwise, you’ll need to do some homework each year to understand the amount of the quarterly tax payments you need to send to Uncle Sam. Put simply, you need to figure your expected adjusted gross income, deductions, exemptions, and credits for the coming year to come up with a tax estimate, then make payments on a quarterly basis to avoid penalties. Additional factors like alternative minimum tax (AMT) or self-employment tax could come into effect. Short of hiring an accountant to help you, the IRS provides this worksheet to help you then determine the amount of tax you’ll owe. It can also be useful to use your prior year’s results as a guide. The trouble starts when your taxable income varies wildly from what you expected. There might be a case, for example, where your small business lands a superstar customer, which causes your revenue to double halfway through the year. Or, maybe you received a massive bonus from a big sale before year-end. Great news, right? Well yes, except now the IRS is going to expect their cut of that windfall. Failing to pay enough tax, after all, will land you a penalty. This is where something called the Safe-Harbor law comes into play. Put simply, you must either shoot for 90% of your tax for the current year (even though you likely don’t know this number in advance) or 100% of the tax shown on your prior year’s tax return to avoid an estimated tax penalty. If you earned more than $150,000 for the year, then the requirement increases to 110%. If you’ve had a year where you received an unexpectedly large windfall, then it might make sense to pay 110% of your prior year’s tax through estimated payments. If your income is high enough compared to last year, you’ll still likely owe more in April, but you’ll avoid paying a penalty. If, on the other hand, your income for the year was much less than last year, then the 90% rule comes into play. While you might be due a refund in April, you still need to shell out the cash this year to avoid the penalty–which can sometimes be difficult if you’re in a cash crunch.

Planning your estimated tax payments

That’s why it can also make sense to take a fresh look at your estimated income on a quarter-by-quarter basis. If you are experiencing significant fluctuations in your income, this could be an opportunity to revisit your quarterly payments and make adjustments. If you’re a retiree, there is another little secret I can share with you: you can set up tax withholding on your IRA and Social Security distributions as a way to help avoid this whole estimated taxes hassle in the first place. These payments do not need to be made quarterly; so even a distribution made at the end of the year could help you avoid tax penalties. While you still need to estimate what your income will be for the coming year in order to withhold the appropriate amount, it sure can beat having to bother with making those quarterly payments.