Overview
Estimated tax payments are the IRS’s way of collecting income tax as taxpayers earn or receive income during the year rather than waiting until April. If your employer does not withhold enough tax from wages — or you don’t have wages at all — you generally must make quarterly estimated payments to avoid interest and underpayment penalties (IRS Publication 505; Form 1040-ES).
In my work as a CPA and financial planner, I see two repeated mistakes: taxpayers underestimating their self-employment tax liability and relying on last year’s withholding when their income shifts significantly. Getting estimates right keeps cash flow manageable and prevents surprise tax bills.
Who generally needs to make estimated tax payments?
- Self-employed individuals and independent contractors who pay no or limited withholding.
- Small-business owners, partners, and S-corporation shareholders receiving pass-through income.
- Investors and traders who expect sizable capital gains or dividend income with little tax withheld.
- Property owners with strong rental income not offset by withholding.
- High-income taxpayers whose withholding won’t cover their tax bill.
You usually need to pay estimated taxes if you expect to owe $1,000 or more after subtracting withholding and refundable credits. The $1,000 threshold and penalty rules come from IRS guidance; see Publication 505 and Form 1040-ES for worksheets and instructions.
When are estimated tax payments due?
Estimated federal payments are typically due four times a year: mid-April, mid-June, mid-September, and mid-January of the following year. When those calendar dates fall on a weekend or federal holiday, the IRS shifts the due date to the next business day. Use the current year’s Form 1040-ES instructions or IRS payment pages for exact dates.
State estimated tax due dates often mirror the federal schedule but vary by state. If you have a state obligation, consult your state tax agency or see our guide on State Estimated Tax Payments for specific rules.
How to calculate your estimated tax: a practical step-by-step method
- Project your total income for the year (wages, business income, interest, dividends, capital gains, rental income). Include reasonable estimates for bonuses or seasonal income.
- Subtract expected adjustments and deductions (business expenses, IRA contributions, the standard deduction or itemized deductions).
- Compute tentative taxable income and apply the current marginal tax rates to estimate income tax.
- Add self-employment tax if you are self-employed. Self-employment tax covers Social Security and Medicare contributions; after calculating the gross self-employment tax, you can deduct one-half of it as an adjustment to income when computing income tax.
- Subtract expected nonrefundable credits and any withholding already taken.
- The remainder is the amount you expect to owe. Divide by four for equal quarterly payments — or use the annualized method if your income is irregular.
The IRS provides a worksheet in Form 1040-ES that walks through these steps. If your income fluctuates a lot during the year, consider using the annualized income installment method (Form 2210, Schedule AI) to reduce penalties for uneven earnings.
Example (simplified):
- Expected taxable income: $80,000
- Estimated tax at marginal rates: $12,000
- Self-employment tax (approximate): $10,000 (pre-adjustment)
- Half of SE tax deductible: $5,000
- Tax after adjustments and credits: $11,000 (net)
- Estimated quarterly payment: $2,750
This example is for illustration only. Use Form 1040-ES worksheets or tax software for precise calculations.
Safe-harbor rules and how to avoid underpayment penalties
To avoid an underpayment penalty, you generally must pay whichever of the following is smaller:
- At least 90% of the tax you will owe for the current tax year, or
- 100% of the tax shown on your prior-year return (110% if your adjusted gross income was more than $150,000 — or $75,000 if married filing separately).
These are commonly called the “safe-harbor” rules (IRS Publication 505). If you meet a safe harbor, you won’t owe a penalty even if you still owe tax when you file.
If your income is seasonal or clustered in certain months, the annualized method can lower or eliminate penalties by matching the payment schedule to when income is actually received. See Form 2210 instructions for annualizing.
Payment options and recordkeeping
How to pay:
- IRS Direct Pay (no fee) — links to your bank account.
- EFTPS (Electronic Federal Tax Payment System) — required for many businesses; allows scheduling and confirmations.
- Credit/debit card payments — fees apply through third-party processors.
- Paper vouchers with Form 1040-ES — mail with a check or money order.
Keep documentation: confirmation numbers, bank statements showing payments, and copies of any vouchers. If the IRS sends a CP (estimated payment) notice, the records make it straightforward to resolve errors.
Special considerations
- Self-employment tax: Self-employed taxpayers must include both income tax and self-employment tax in their payment calculations. Use Schedule SE and Form 1040-ES worksheets to estimate both components.
- Changes in income: If income changes significantly midyear, re-estimate and adjust remaining payments to avoid under- or overpaying.
- Overpayments: If you overpay estimated taxes, the excess will be applied to your return and either refunded or used toward next year’s taxes.
- State rules: States have their own estimated tax rules, thresholds, and penalty calculations. Check your state tax agency or our State Estimated Tax Payments article for specifics.
Common mistakes and how I advise clients to avoid them
- Using only last year’s tax without adjusting for a raise, sale of investments, or new freelance income. Revisit estimates whenever income changes.
- Forgetting self-employment tax. In my practice I see freelancers who correctly estimate income tax but omit the SE tax, creating a large surprise at filing.
- Missing a quarterly payment date. Set calendar reminders and consider automatic payments through EFTPS or payroll withholding adjustments.
If you are a freelancer or contractor, our guide on Estimated Taxes for Freelancers offers practical worksheets and examples. If you prefer a step-by-step calculation walkthrough, see How to Calculate Your Estimated Tax Payments for the Year. For strategies that preserve cash flow while meeting IRS rules, read our piece on Estimated Tax Safe Harbor.
- Estimated Taxes for Freelancers: https://finhelp.io/glossary/estimated-taxes-for-freelancers/
- How to Calculate Your Estimated Tax Payments for the Year: https://finhelp.io/glossary/how-to-calculate-your-estimated-tax-payments-for-the-year/
- Estimated Tax Safe Harbor: https://finhelp.io/glossary/estimated-tax-safe-harbor/
Penalty relief and exceptions
The IRS may waive the underpayment penalty in limited circumstances such as a casualty, disaster, or other unusual situation. You can request relief and provide documentation. Also, certain taxpayers who qualify for safe-harbor payments or who use annualization might avoid penalties even with uneven income.
To calculate any penalty due, the IRS uses Form 2210. If you receive a notice about underpayment, review Form 2210, your payment record, and consider consulting a tax professional to determine whether you qualify for a waiver or relief.
Next steps and practical checklist
- Estimate your income and tax now — don’t wait until the next quarter.
- Use Form 1040-ES or tax software to compute quarterly amounts.
- Choose a payment method (Direct Pay or EFTPS are common and reliable).
- Revisit estimates whenever income changes materially.
- Keep records of payments and confirmations.
Professional disclaimer
This article is educational and does not replace personalized tax advice. Tax laws and IRS procedures can change; consult a qualified tax professional or the IRS directly for guidance about your specific situation (see IRS Form 1040-ES and Publication 505).
Authoritative sources
- IRS Publication 505, Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505
- About Form 1040-ES, Estimated Tax for Individuals: https://www.irs.gov/forms-pubs/about-form-1040-es
- Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts: https://www.irs.gov/forms-pubs/about-form-2210
