What Happens if You Overpay Estimated Taxes? (And How to Get Your Money Back If You Do)

by
Soo Lee, CPA
Updated 
September 21, 2022
August 16, 2022
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Reviewed by
Sarah York, EA

New freelancers and independent contractors have a lot to learn when it’s time to file taxes. One of the questions that trips them up most is how to deal with estimated quarterly taxes.

How are you supposed to know how much money you’ll earn in a year when you’re just getting started? Not paying enough is probably bad. But could paying too much cause problems too?

Contents

Can you get in trouble for overpaying your taxes?

No, there are no penalties for overpaying your tax bill. If you overpaid, don’t worry: You won’t owe anything extra to the IRS. Instead, you’ll get a tax refund for your overpayment amount.

This is true if you overpaid estimated quarterly taxes. And it’s also true if you had too much money to withhold from a W-2 paycheck.

One downside to overpaying: it means you’re letting the IRS hold onto your money for most of the year. In effect, you're basically giving it a small loan.

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So when do you see penalties?

While overpaying is fine, underpayments are another story. That can mean some steep penalties, plus paying interest on the money you owed.

Will the IRS notify you if you’ve overpaid?

No, the IRS will not notify you if you’ve overpaid your estimated taxes, or had too much withheld from your paycheck.

You’ll generally figure this out yourself when you fill out your 1040 tax return. That’s when you can go ahead and ask for the extra money back. (If you’d like to read about that right away, skip ahead to the section on reclaiming your overpayment amount.)

📮 You might get notified if you don’t claim certain credits

You won’t get a notice if you overpay, but the IRS might let you know if you’ve left some money on the table in the form of a tax credit.

There are a few credits that the IRS computers automatically check for. If they find you qualify but haven’t claimed them, they’ll send you a notice.

This notice tells you what your new (smaller) bill — or refund amount — will be. (In some cases, the IRS may ask you to provide additional information (or documentation) before it finalizes the correction.)

Now, let’s explore some of the ways you can end up overpaying — and how to avoid them.

What overpaying means for your estimated taxes

There’s one scenario where you might easily overpay your taxes. It’s a problem for more and more taxpayers as people shift toward freelance and gig economy jobs.

We’re talking about estimated taxes — also known as “quarterly taxes,” because you pay them four times a year.

Who needs to pay estimated quarterly taxes?

You should pay quarterly if you expect to owe $1,000 or more on income when you don’t have anyone withholding taxes for you.

This goes for any income you earn outside of a regular, W-2 job. Here are some people it applies to:

If you’re supposed to make these payments, but don’t, you’ll be charged an underpayment penalty — with one exception.

What if you didn’t owe taxes last year?

Good news! If you didn’t owe taxes when you filed last year, then you won’t be on the hook for penalties if you underpay this year! (But you will have to start making payments going forward.)

Even if you owe more than $1,000, you’re off the hook for penalties since it’s a first-time offense. 

Note: This only applies if:

  • 🇺🇸 You were a US citizen (or US resident) for the whole previous calendar year
  • 📅 Your previous year’s tax return covered all 12 months

How can you end up overpaying on your quarterly taxes?

Many people don’t really know exactly how much money they’ll earn as a self-employed person. And since making estimated quarterly payments requires, well, estimating, getting the numbers right can be a challenge.

Between growing businesses, the shifting economy, and on-and-off side hustles, it can be hard to know what your income for the year will be. 

The pros and cons of overpaying on your taxes

“Wait,” you may be asking, “how can there be a good side to giving the IRS more money than you have to?”

👍 Pro: Paying extra can make April less stressful

If you overpay now, you don’t need to worry about a hefty tax bill come April. You’ll even get a refund.

For self-employed people paying quarterly, padding each payment with a little extra money is a way to frontload the stress. It can be tempting — as long as you can afford it. 

👎 Con: Extra payments may not be affordable

A lower tax bill later means a higher tax bill now. Plenty of taxpayers can’t afford to wait for months to get that money back. 

For people who pay estimated taxes, overpaying in the first quarter means you’ll need to wait all the way until the following April to get your excess payment back — not exactly ideal.

How to avoid overpaying your estimated taxes

There are a few strategies that can help you avoid giving the IRS more money than you have to. Regardless of what method you use, though, you should make sure you’re working with the right numbers.

Make sure you calculate your estimated taxes using your net income — meaning, after you subtract your business write-offs. 

Not sure which write-offs you can claim? Check out our list of the best tax deductions for freelancers. Or save yourself the effort and try the Keeper Tax app.

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We’ll automatically scan your purchases and let you know which ones to take off come tax time. We can even file your taxes for you!

Now, here’s how to make sure you’re paying the correct amount — and no more.

Method #1: Use a dedicated calculator

🏆 Best for: People who have a sense of how much they’re going to earn

Some freelancers and independent contractors are lucky enough to know how much their annual earnings will be. For example, maybe you work with one or two anchor clients who give you pretty steady pay.

If that’s you, we’ve made a quarterly tax calculator. Use it to quickly figure out how much tax you should pay per quarter.

Method #2: Take advantage of the safe harbor

🏆 Best for: People who expect to earn a significantly higher or lower amount than the year before

The “safe harbor” is a minimum amount you can pay to avoid getting penalized. Even if you end up technically underpaying, hitting the safe harbor targets keeps you, well, safe.

To use this approach, you must pay either:

  • 100% of the amount you owed on last year’s tax bill, or
  • 90% of this year’s upcoming tax bill (if you already have a good idea of what your income will be)

Whichever one you choose, divide into four equal payments, and there you have it!

Which amount should you pay?

💡 Tip: When figuring out whether to use 100% of last year or 90% of this year’s income, use the lower number.

You’ll be safe as long as you hit either one of these amounts. Might as well use the one that gets you the lowest estimated tax payments.

Method #3: Use annualized income installments

🏆 Best for: People who receive uneven income throughout the year

This one requires more math throughout the year. But it provides you with a more accurate payment per quarter. With it, you can pay little or no estimated tax for the quarters where you earn little or no income.

Basically, you:

  • 🧮 Calculate your total tax liability at four times a year — before each quarterly payment due date — to get a snapshot of how your income fluctuates
  • 💵 Pay your estimated taxes based on that prorated income

You can learn more about how it works in our article on avoiding estimated tax penalties.

How to use the annualized income installment method

File IRS Form 2210 with your tax return the following April. This form explains why you made uneven payments every quarter and shows your annualized income calculations.

Use this method carefully, though. If you can’t prove your calculations, the IRS may raise some eyebrows.

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How to reclaim overpayments on your taxes

Good news: You can get the money back that you overpay on your taxes. You’ll just need to be patient.

There are two ways you can use this money.

Option #1: 🎁 Get the extra money back as a refund

The simplest approach: request your overpayment back as a tax refund. This works like any other refund — based on the final calculations at the end of your 1040.

When you file your taxes, just fill out the section that starts on line 34. Here, you’ll tell the IRS where you’d like your refund sent.

The refund section of a black Form 1040, lines 34-36

If you file through Keeper Tax, we’ll take care of this part for you and make sure you get your refund.

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When will you get your refund for overpaying?

If you end up getting a refund, it should reach you in about 8-10 weeks. If the IRS takes longer than 45 days to send you your refund, you’ll likely receive some interest along with it. 

Option #2: 🗓️ Apply the extra money to your next tax bill

You can also apply your tax overpayment to your next estimated tax bill. Call it a prepayment.

Go to the same section of your 1040 where you’d request your refund as a check or direct deposit. On line 36, there’s an option to apply money to next year’s estimated tax.

Do you have to apply the whole amount?

No, you can choose to apply your whole refund, or part of it. Just specify the exact amount you want applied on line 36.

Refund section of a blank Form 1040, with line 36 — the amount you want applied to next year's quarterly taxes — circled in blue

It’s completely possible to prepay part of next year’s taxes and get something back for yourself right away.

At the end of the day, though, it’s best to try to calculate your taxes accurately — especially when making quarterly payments. That way, you’re never overpaying, and the IRS doesn’t get to hold onto your hard-earned money.

Soo Lee, CPA

Soo Lee, CPA

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Soo has over 10 years of experience at publicly traded companies and public accounting firms offering tax, accounting, payroll and advisory services to clients in diverse industries, including manufacturing, wholesale and retail, construction, real estate development, banking, finance, and professional and legal consulting. At Pricewaterhouse Cooper, she worked with many foreign-owned companies and advised clients on a broad range of issues, including federal and state tax minimization, determining the optimal structure for new foreign investments, and restructuring and reorganization for existing operations.

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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email support@keepertax.com if you have questions.