Cash News
You probably have April 15 etched in your brain as the date taxes are due. But if you’re self-employed, you do freelance work, or you’re a gig worker, you may need to file estimated taxes each quarter. Sometimes, these are referred to as quarterly tax payments.
Not sure when quarterly taxes are due or whether you need to file them? We’ll walk you through the rules so you can stay on the right side of the Internal Revenue Service.
What are estimated tax payments, and when are they due?
Estimated tax payments are made periodically to the IRS on income that isn’t subject to regular withholdings.
The U.S. tax system is pay-as-you-go. Essentially, taxpayers are expected to pay taxes on income as it’s received instead of waiting until the April 15 due date.
When you have a traditional W-2 job, your employer withholds taxes from your paychecks, so you don’t need to worry about making payments to the IRS throughout the year. But taxes aren’t automatically held from some income sources, which is where estimated taxes come in.
You may need to pay estimated taxes if you have the following types of taxable income:
However, if you also earn a salary or have pension income and you have enough money withheld to cover the tax liability from your other sources of income, you may not be required to make estimated tax payments.
You’ll generally need to make estimated tax payments if both of the following are true:
-
You expect to owe the IRS at least $1,000 after withholdings and any refundable tax credits, AND
-
You expect the amount withheld for taxes from your paychecks (plus any refundable tax credits) will add up to less than 90% of your total income tax bill for this year OR 100% of your tax bill for the previous year. But if your adjusted gross income (AGI) was more than $75,000 (if you’re a single filer) or $150,000 (if you’re married filing a joint return), you’ll need to withhold 110% of last year’s tax bill to avoid a potential penalty.
Though estimated tax payments are sometimes referred to as quarterly taxes since they come around four times a year, the name is a bit of a misnomer. The payment periods that estimated taxes cover don’t come around every three months; instead, they range from two to four months, as you’ll see in the chart below.
Quarterly estimated tax payment deadlines fall on the 15th of the month in January, April, June, and September. If the deadline falls on a weekend or a legal holiday, they’re due the next business day.
You can also make more frequent estimated tax payments if doing so simplifies your budget. For example, you could pay taxes monthly or weekly to avoid having to send the IRS a big chunk of change every few months.
How to calculate estimated taxes
You can use IRS Form 1040-ES to calculate how much you owe in estimated taxes. The form includes a worksheet that helps you calculate the amount due based on your estimates of your adjusted gross income and tax deductions for the year.
There are two main ways you can estimate how much you owe:
-
Based on the prior year’s earnings: If you owed $10,000 in taxes last year and you expect your income and tax liability will be similar in the current year, you could pay $2,500 each payment period. This method is usually best for those whose income doesn’t fluctuate a lot from month to month or year to year.
-
Based on your income for the payment period. You could opt to calculate your estimated taxes based on your earnings for the period. Say you earned $20,000 between June and August and your effective tax rate is 20%. You could pay $4,000 in estimated taxes based on your tax liability for those three months. This approach is often best for those whose income fluctuates by season or from year to year.
Note that if you own a business or you’re a freelancer or gig worker, you’ll need to account for self-employment taxes. Basically with a W-2 job, both you and your employer typically each kick in 7.65% of your wages for Social Security and Medicare taxes. When you’re self-employed, though, you’re responsible for both the employee’s and employer’s side of this tax, or 15.3% of total wages for most people.
If you discover you overpaid your estimated taxes when you file your return for the calendar year, you can receive the extra money as a tax refund. You can also apply the overpayment to a future estimated tax bill.
Mind Your Money
How to pay estimated taxes
There are several ways to make your estimated tax payments, including:
-
Online using your IRS account at IRS.gov/payments
-
Using the Electronic Federal Tax Payment System (EFTPS)
-
Same-day wire transfer through your bank
-
Electronic funds transfer
-
By phone
-
Sending a check or money order through the mail
-
By cash at IRS retail partners
You can also use these methods to make payments when you file your federal tax return on tax day.
What is the penalty for not paying quarterly taxes?
If you don’t pay quarterly taxes as required, you’ll owe interest on the balance due in addition to an IRS underpayment penalty. Usually, this penalty is 0.5% of the tax bill for each month (or partial month) that the balance is unpaid, though the penalty is capped at 25% of the amount you owe.
You may be able to avoid the penalty in some situations, such as:
-
You couldn’t pay due to a casualty, disaster, or another unusual circumstance.
-
You retired after reaching age 62 or became disabled during the year the estimated payments were required.
If you can’t afford to make your estimated tax payments, you should pay what you can to minimize the interest and penalties. Try to increase the amount you set aside for taxes so that you can pay your bill as soon as possible.
Should you still owe more than you can afford when you file your tax return for the year, make sure to file your taxes on time anyway. The penalties for failing to file a return are far steeper than the penalties for failure to pay or underpaying. You can apply for an IRS payment plan, which can give you an extension or allow you to pay off your tax bill in installments.
FAQs
Are IRS quarterly payments mandatory?
You’re generally required to make quarterly payments if you expect to owe at least $1,000 for the tax year after tax withholdings and refundable credits. Because self-employment income isn’t usually subject to withholdings, you’re often required to make quarterly tax payments if you’re a small business owner or independent contractor. However, if your main source of income is a W-2 job, you’re probably not required to make quarterly tax payments.
Will I get in trouble if I don’t pay estimated taxes?
You’ll owe interest and penalties if you don’t pay estimated taxes as required, so it’s important to set aside money for federal income taxes throughout the year if you have income that’s not subject to withholding.
How do I know if I have to pay estimated taxes?
You generally have to pay estimated taxes if you expect your tax bill to exceed $1,000 for the year after withholdings and refundable tax credits. If you’re self-employed, you do contract work (such as freelancing or gig work) or you have substantial income from capital gains, dividends or interest, chances are good that you need to pay estimated taxes.