Estimated tax payments: What you need to know

In a nutshell

An estimated tax payment is the amount of income tax you’re responsible for paying during the year when taxes are not withheld. This might include income from self-employment, dividends, rental property income or a cash award.

• Estimated taxes may be required for certain taxpayers.
• Failure to pay enough taxes through payroll withholding or estimated taxes can result in a penalty.
• Typically, freelancers, the self-employed and some investors must pay estimated taxes.

What are estimated tax payments?

Estimated tax payments are tax payments you make throughout the year. The IRS requires that some taxpayers make these payments throughout the year, and some states also require them. But you can also pay them voluntarily, so you’re not hit with a huge tax bill at filing time.

Estimated tax payments help ensure that if you don’t have sufficient taxes withheld from your paycheck that you’re paying enough income tax during the tax year. Workers who are self-employed, those who did not have enough taxes withheld from their wages and certain businesses might need to make estimated tax payments.

Additionally, even if you are paid a salary or you receive pension payments, you may owe estimated taxes if you haven’t had enough withheld from your paychecks.

How are estimated taxes calculated?

You can estimate your taxes for the upcoming year so you’re fully paid up with the IRS before you file in April.

There are a couple of ways to calculate your estimated tax payments:

Use your prior year’s taxes as a guide

Using last year’s tax payment if you expect to earn the same income this year is a reasonable benchmark for estimating tax payments. For example, if you owed $8,000 in taxes in 2023, you could make four estimated payments of $2,000 each quarter during 2024. This method works best for taxpayers whose annual income is stable.

Annualize your income

In this case, you might take your income for the first quarter of the current year and multiply it by four to estimate your annual income. You can repeat this process each quarter or at any point during the year. Using this estimate to annualize your income and deductions for the year, you’ll make quarterly estimated payments accordingly. This method might work best if your income varies from year to year.

Avoid penalties by paying estimated taxes

You can use voluntary estimated tax payments to avoid a hefty tax bill and to avoid paying penalties if you’re unsure that you’ll have enough to pay your entire tax bill at filing time.

If your adjusted gross income is $150,000 or less ($75,000 or less if you’re married and file separately), you can avoid a penalty by paying at least 90% of this year’s tax liability or 100% of the income taxes paid for the prior tax year as estimated tax payments.

If you have an adjusted gross income above $150,000 ($75,000 if you’re married and file separately), you must either pay 90% of last year’s tax liability or 110% of this year’s tax liability as estimated payments (or have that amount withheld) to avoid penalties, according to the IRS.

Note: For taxpayers who are classified as farmers or fishermen, the rules are a bit different. If you meet the criteria for this classification, you can replace the 90% requirement with 66.67%. Refer to the IRS’ special rules for farmers and fishermen to see if you qualify for this classification.

What is the purpose of estimated tax payments?

Estimated tax payments help ensure that those who don’t have sufficient taxes withheld from their compensation pay enough federal and state taxes during the tax year.

Making estimated tax payments helps taxpayers stay current on their taxes. This way, they avoid falling too far behind or potentially coming up short on cash to make a larger payment by the tax filing deadline.

When are estimated taxes due?

For 2024, the due dates for estimated tax payments are:

• April 15, 2024, for the first quarter of 2024.
• June 17 for the second quarter of 2024.
• Sept. 16 for the third quarter of 2024.
• Jan. 15, 2025 for the fourth quarter of 2024.

Any estimated payments required by your state of residence are typically due on the same dates.

While these are the IRS’s deadlines, estimated tax payments can be made at any time. For example, if your quarterly estimated payments are $600, you could make six payments of $100 each during the quarter if that’s easier. Making several smaller payments is more doable than making a larger payment all at once.

Who should make estimated quarterly tax payments?

For some taxpayers, estimated tax payments are required. For others, they’re optional but recommended.

Taxpayers who don’t have enough tax withheld

If you don’t think you’ll have a sufficient amount of taxes withheld from your paycheck during the year, consider making estimated payments. This can help you avoid a massive tax bill when it comes time to file your return.

The IRS requires you to make estimated payments if:

• You believe that you’ll owe more than $1,000 in federal income taxes even after the amount withheld from your paychecks and the application of any tax credits to your tax bill.
• Your withholding plus any refundable credits will cover less than 90% of your federal income tax for the current year or 100% of your prior year’s tax liability, whichever is less.

If you catch it early enough in the year, you could bump up your withholding for the remainder of the year to catch up on tax payments, but calculate this carefully to avoid overpaying.

Self-employed taxpayers

This group includes independent contractors, freelancers and others who expect to owe $1,000 or more in federal income taxes. Most of these workers are not paid by regular payrolls, so their tax is not automatically withheld. If you’re self-employed, consider making estimated tax payments so you pay enough taxes during the year.

Corporations

Businesses that file as a corporation must make estimated tax payments if they estimate they will owe $500 or more in federal taxes in a filing year.

Landlords and some investors

Owners of rental properties and some other types of investments may need to pay estimated taxes. The reason is that even if they are employed and their employer is withholding an ample amount from that role, this doesn’t take into account their taxable investment income, which needs to be reported. These taxpayers will want to estimate their taxable income and pay estimated taxes accordingly.

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If your income is mostly paid by an employer, you generally won’t need to make estimated tax payments if enough money is withheld from your regular paychecks.

However, if your income is from self-employment, freelancing or real estate and other types of investments, you may be required to make estimated tax payments to avoid underpayment penalties. This can also apply to someone with a regular job but isn’t withholding enough taxes from their paychecks.

Frequently asked questions (FAQs)

What is the 110% rule?

If your adjusted gross income for the prior year was over $150,000 ($75,000 if you’re married and file separately), you’ll pay 110% of the prior year’s tax liability. This satisfies the safe-harbor requirement to avoid an underpayment penalty.

What happens if you don’t pay estimated taxes?

If you don’t pay estimated taxes, or if your payments are not large enough, you could owe an underpayment penalty. The amount of any penalty will depend on the amount owed and the length of time that amount is owed.

What is the safe harbor for estimated tax payments?

The safe harbor for estimated tax payments is the level of payments that will avoid a penalty for the tax year in question.

The IRS won’t assess an underpayment penalty if you pay at least 90% of the taxes owed for the current year or 100% of the tax you owed for the prior tax year through estimated payments, or if your tax liability is less than $1,000 after subtracting withholdings and any tax credits.

For higher-income taxpayers, safe harbor rules are a bit different. If your adjusted gross income on last year’s return was over $150,000 ($75,000 if you’re married but file separately), you must have paid at least 90% of the tax you’ll owe for the current year or 110% of your tax from last year’s return.