What is the purpose of tracking estimated tax payments?

Tracking estimated tax payments primarily serves the purpose of avoiding penalties for underpayment of taxes during the year. When individuals or businesses predict that they will owe at least a certain amount of tax that isn't withheld from their wages, they are generally required to make estimated tax payments throughout the year. This process helps to ensure that enough tax is paid in advance, mitigating the risk of facing an underpayment penalty at the time of filing their tax return.

Making these payments allows taxpayers to stay compliant with tax obligations and ensures they meet the minimum payment thresholds set by the IRS. If insufficient payments are made, taxpayers may incur penalties, which can add a financial burden on top of the taxes owed. Therefore, keeping track of these payments is essential for maintaining fiscal responsibility and adhering to tax laws.