Key Takeaways
- Estimated Taxes: Estimated taxes are prepayments of income tax made throughout the year to cover taxes on income not subject to withholding, such as self-employment or investment income.
- Penalties: Failure to pay estimated taxes when required may result in penalties and interest from the IRS.
- When To Pay: Estimated tax payments are typically due quarterly, with deadlines spaced throughout the year.
- Estimated Tax Exemption: Certain individuals, such as those with low income or who meet specific criteria, may be exempt from paying estimated taxes.
- How To Calculate Them: Accurate calculation and timely payment of estimated taxes can help avoid financial surprises and penalties at tax time.
It’s safe to say that tax season is unnecessarily stressful, but at least it only comes around once a year, right? Think again.For millions of Americans, especially freelancers, small business owners, and investors, paying estimated taxes is an essential part of staying on the IRS’s good side and to avoid breaking the rules. These estimated tax payments, which are made quarterly, are designed to ensure that workers pay taxes on income that is not automatically subjected to withholding (like it happens for most regular employees), such as earnings from self-employment, investments, or rental properties. Imagine that fun four times a year.
So, if you’ve ever been surprised by a large tax bill or penalty, understanding estimated taxes can help you plan better for the future and avoid repeating that situation.With this helpful guide, we intend to cover everything you need to know about estimated taxes—what they are, who needs to pay them, how to calculate them, and what to do if you miss a payment, as well as a step-by-step guide on how to calculate them. Read on!
What Are Estimated Taxes?
Let’s start with the basics. Most workers have a portion of their wages withheld every time they get paid in order to cover their income taxes for the year. But what are self-employed people and small businesses supposed to do? Enter estimated taxes.
Estimated taxes are quarterly payments made to the IRS in order to cover income tax, self-employment tax, and any other relevant taxes that aren’t automatically withheld for certain types of workers. This whole system was designed to help taxpayers avoid a too-large bill when filing their annual tax returns.
What Are Estimated Taxes For?
When you think about it, getting paid only once a year would create all sorts of financial complications for anyone. The IRS feels the same way, which is why it requires these quarterly payments to ensure a steady revenue stream throughout the year. These taxes apply to income sources such as:
- Self-employment earnings (e.g., freelance or contract work).
- Interest and dividends.
- Rental income.
- Capital gains.
- Alimony (only in applicable cases).
Who Pays Estimated Taxes?
Typically, individuals who expect to owe $1,000 or more in taxes after subtracting withholding and credits are required to pay estimated taxes; this applies to individuals such as sole proprietorships, partnerships, and S corporation shareholders. It also applies to corporations if they expect to owe $500 or more in taxes (which, as you can imagine, is the likeliest scenario).
If you want to learn the specifics on who has to pay estimated taxes, be sure to check out the worksheet in Form 1040-ES, Estimated Tax for Individuals on the IRS’s official website.
Do I Have To Pay Estimated Taxes?
As it’s usually the case with taxes, it depends on your personal situation. Whether or not you need to pay estimated taxes comes down to your income sources and tax withholding situation. Let’s look at each scenario:
Workers Who Must Pay Estimated Taxes:
- Freelancers and Self-Employed Individuals: Without an employer to withhold taxes for them, these workers are responsible for paying their taxes directly each quarter.
- Landlords: Individuals who earn income from rental properties are taxable, since that income is not subject to withholding.
- Investors and Traders: For the same reason as with landlords, all earnings from interest, dividends, and capital gains require estimated tax payments each quarter.
Who Is Exempt From Paying Estimated Taxes?
Obviously, not everyone is required to make estimated tax payments. You may be exempt if you meet specific criteria. According to IRS rules, most taxpayers can avoid the underpayment penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid 90% of the tax for the current year (or 100% of the tax shown on the return for the prior year, whichever is smaller).
You also have the option to annualize your income in order to avoid or lower the penalty (or by making unequal payments).
Common exemptions:
- Low-Income Earners: Even if you’re self-employed, if your total tax liability is below $1,000 after subtracting withholdings and credits, you may not even need to make estimated payments at all.
- Wage Earners With Sufficient Withholding: It goes without saying that regular employees whose employers withhold enough tax from their paychecks are generally exempt from paying estimated taxes; remember, however, that you will have to pay estimated taxes if you have your own business or do freelance job on the side.
- Farmers and Fishermen: Special rules apply to these groups, often reducing or eliminating the need for quarterly payments.
Safe Harbor Rule:
You can avoid penalties if:
- You pay at least 90% of the current year’s tax liability, or
- You pay 100% of the previous year’s tax liability (110% for higher-income taxpayers).
How To Pay Estimated And Quarterly Taxes
Making estimated tax payments involves several steps and proper documentation. Make sure you have a backup of everything before going ahead with your payment to make sure that you’ll have a strong case if the IRS decides to ask questions or audit you.
Steps to Pay Estimated Taxes
- Calculate Your Taxable Income: First of all, estimate your total income for the year, including wages, self-employment earnings, and investment income. This total represents your taxable income.
- Use IRS Form 1040-ES: Thankfully, this form includes worksheets and vouchers to help you with the calculations, check if you actually have to pay taxes, and even submit payments.
- Choose a Payment Method: You have multiple options when it comes to estimated taxes. Your payments can be made via:
- IRS Direct Pay
- EFTPS (Electronic Federal Tax Payment System)
- Check or money order (using Form 1040-ES vouchers)
- Keep Records: We don’t mean to sound like a broken record, but we seriously cannot understate the importance of maintaining thorough records of payment confirmations in case an audit happens.
A Step-By-Step Guide To Calculate Estimated Taxes
Calculating your estimated taxes accurately will ensure you pay the right amount, thus avoiding penalties and inquiries by the IRS. Here’s how to do it right:
Step 1: Estimate Your Income
Project your total income for the year. Include all sources such as self-employment income, interest, and dividends.
Step 2: Determine Your Deductions and Credits
Subtract eligible deductions, like retirement contributions or business expenses, and factor in any applicable tax credits.
Step 3: Apply Tax Rates
You can use the IRS tax tables to calculate the tax owed on your taxable income. Don’t forget to include self-employment taxes (from Social Security and Medicare).
Step 4: Account for Withholding
If you have any tax withheld from wages or other sources, subtract it from your total tax liability. It’s important to remember this step because that type of income is taxed separately, so you’d be making two mistakes at once.
Step 5: Divide Into Quarterly Payments
Divide the remaining amount by four to determine each quarterly payment. Adjust payments if your income varies significantly throughout the year. In case you get unequal payment throughout the year, you can annualize your income to avoid underpayment penalties.
Example
If your estimated annual tax liability is $12,000 and $4,000 is withheld, your quarterly payments would be $2,000 each.
2025 Due Dates For Estimated Taxes
Estimated taxes are due four times a year (which is why they’re also known as quarterly taxes)::
- April 15, 2025: Covers income earned January 1 – March 31.
- June 15, 2025: Covers income earned April 1 – May 31.
- September 15, 2025: Covers income earned June 1 – August 31.
- January 15, 2026: Covers income earned September 1 – December 31.
Just like with regular taxes, a delay in your estimated tax payments may result in penalties, so it’s crucial to mark these dates on your calendar. If you’re self-employed or run your own small business and the day-to-day responsibilities are already too much to handle, we seriously recommend you get the help of an accountant or a tax professional to help you stay on top of your taxes.
What Happens If You Missed the Estimated Tax Payment Deadlines?
As with regular taxes, missing the payment deadline is not like landing in the “GO TO JAIL” space, but while it doesn’t immediately spell disaster, there are consequences for it.
Consequences of Missing Payments
As expected, the IRS imposes penalties for underpayment or late payments. They can hit you with the expected interest charges that will accrue on unpaid taxes from the due date until the full amount is paid. There are also penalty rates that are calculated based on the underpayment amount and the federal short-term interest rate, plus 3%.
What To Do If You Miss a Deadline
- Make a Payment ASAP: Like we said, missing a payment is not the end of the world, but the sooner you pay, the less interest and penalties you’ll accrue.
- Request a Waiver: In some cases, the IRS may waive penalties for reasonable cause that are outside of your control (such as natural disasters and such).
- Adjust Future Payments: You can also increase subsequent payments to cover the shortfall and end up square on your overall payments.
The Final Word On Estimated Taxes…
They might not be the most popular thing around, but estimated taxes are a vital part of managing your tax obligations if you earn income outside of having a “traditional” job. Without an entity automatically withholding part of your income for tax purposes, it’s of utmost importance to understand the rules, deadlines, and calculation methods that can help you stay compliant and avoid penalties.
We agree that the process may seem complex, but there are plenty of resources around to help you with them, like IRS Form 1040-ES and the ever helpful professional tax advisors who can simplify the task for you.
By planning ahead and making timely payments, you can take control of your tax situation and prevent surprises when filing your annual return.
Estimated Taxes: FAQ
- What are estimated taxes?
Estimated taxes are periodic payments made to the IRS to cover income tax, self-employment tax, and other taxes on income not subject to withholding, such as self-employment or investment income. It’s the type of taxes you have to pay when you don’t have a regular job that withholds part of your income for tax purposes, and are paid quarterly.
- Who needs to pay estimated taxes?
Anyone who expects to owe $1,000 or more in taxes after subtracting withholdings and credits, including self-employed individuals, landlords, and investors, typically needs to pay estimated taxes.
- How do I calculate estimated taxes?
Estimate your annual income, subtract deductions and credits, apply tax rates, account for withholding, and divide the remainder into quarterly payments. IRS Form 1040-ES provides worksheets to help with calculations.
- What are the due dates for estimated taxes in 2025?
Payments are due on April 15, June 15, September 15, 2025, and January 15, 2026. These dates correspond to income earned in specific periods throughout the year.
- What happens if I don’t pay estimated taxes?
Failing to pay may result in penalties, interest charges, or both. Penalties are calculated based on the underpayment amount and the federal short-term interest rate plus 3%. There are, however, some options available to you if you want to avoid penalties for underpayment.
- Can I avoid penalties for underpayment?
Yes, by paying at least 90% of the current year’s tax liability or 100% of the prior year’s liability (110% for higher-income taxpayers), you can avoid penalties under the IRS safe harbor rule.
Jacob Dayan
Entrepreneur • SEO Community Tax, LLC
In his capacity as CEO, Dayan has assembled a strong team of attorney practitioners, CPAs and enrolled agents to deliver superior customer service and expected results. His company Community Tax has set the standard for customer service in the tax resolution industry and is widely recognized as an industry leader by its peers. Jacob manages all day-to-day marketing efforts and business operations of Community Tax. As CMO, Jacob is responsible for all digital and offline marketing efforts.
