Quarterly Estimated Taxes

For variable-income earners — founders, partners, RSU-heavy employees, anyone with significant non-W-2 income — the largest predictable lumps are the four federal estimated-tax payments due April 15, June 15, September 15, and January 15 under IRC §6654(c)(2), “Failure by individual to pay estimated income tax”, plus the parallel state payments where applicable. The safe-harbor calculation (section “Safe Harbor”) sets the floor that avoids underpayment penalties: under IRC §6654(d)(1)(C), paying 110% of prior-year total tax in four equal installments immunizes you regardless of what the current year does — and note the threshold, since the figure is 110% only if prior-year AGI exceeded $150,000 ($75,000 married filing separately); below that it is 100%. For the readers of this book it is 110%.

The virtue of the safe harbor is that it makes the bucket sizes knowable in January for the whole year ahead, before you have any idea what the year will actually earn. That is what turns an unpredictable liability into a schedulable one.

Fund the buckets by laddering Treasuries to the four deadlines. One constraint shapes the structure: Treasury auctions bills at 4, 6, 8, 13, 17, 26, and 52 weeks only. There is no 39-week bill, so you cannot buy all four tranches on one January morning and have them mature where you need them. You buy each tranche when an available tenor lands on its deadline.

For a CA household with $400,000 of expected federal-plus-state tax under the safe harbor, holding the full amount in a Treasury-only MMF and moving each tranche out as its tenor becomes available:

• April 15 payment: buy a 26-week bill in mid-October, or a 13-week bill in early January.
• June 15: a 26-week bill in mid-December, or a 13-week bill in mid-March.
• September 15: a 52-week bill the prior September, or a 26-week bill in mid-March.
• January 15: a 52-week bill in mid-January, or a 26-week bill in mid-July.

The longer tenor pays slightly more when the curve is upward-sloping; the shorter one keeps the money flexible longer. Either works — what matters is that the maturity lands a week before the deadline, not on it, so a settlement delay never turns a funded payment into a late one.

If the laddering feels like more administration than the yield justifies, it may well be: on $400,000 the spread between a Treasury-only MMF and a bill ladder is perhaps 10–20 basis points, or $400–$800 a year. Holding the whole reserve in the MMF and simply not spending it is a defensible choice. The ladder earns its keep at larger balances and steeper curves.

Refill in January with the next year’s safe-harbor amount as soon as the prior year’s return crystallizes the new figure.

For households paying current-year actual instead of the safe harbor (section “Safe Harbor” explains when each is cheaper), pre-fund the safe-harbor amount and hold any incremental tax owed in the Treasury MMF as a top-up sleeve. The underpayment penalty rate is the federal short-term rate plus three percentage points under IRC §6621(a)(2), “Determination of rate of interest”, reset quarterly and compounded daily under IRC §6622 — and it is not deductible. Whatever that works out to in a given quarter, it is comfortably above what your cash is earning, which is why over-funding the safe harbor by 10–20% beats cutting it close. The penalty is computed per-quarter on the shortfall, so a large Q4 payment does not retroactively cure a missed Q1.