Paying taxes isn’t just a once-a-year event. If you earn income that isn’t subject to automatic withholding, you may need to file and pay estimated taxes throughout the year. Here’s an overview. For the latest specific details, refer to Publication 505, Tax Withholding and Estimated Tax or form 2210 at irs.gov.
Estimated taxes can feel overwhelming at first, but staying organized and setting aside money regularly can make the process manageable.
Estimated taxes are periodic payments made to the Internal Revenue Service (IRS) on income that doesn’t have taxes withheld automatically. This often includes:
Self-employment income
Rental income
Investment income (interest, dividends, capital gains)
Side business profits
You may need to file estimated taxes if you are in one of the following situations:
Self-employed or an independent contractor
A small business owner
A partner in a partnership
An S corporation shareholder
Someone with untaxed income
Estimated tax payments are typically due at different intervals four times per year:
April 15 – For income earned Jan. 1- Mar. 31
June 15 – For income earned April 1-May 31
Sept. 15 – For income earned June 1-Aug. 31
Jan. 15 (following year) – For income earned Sept. 1 to Dec. 31
If a due date falls on a weekend or holiday, the deadline moves to the next business day.
Income can arrive evenly during the year, such as a paycheck or social security checks.
Here are the general steps for income that arrives evenly during the year:
Estimate your total income for the current year.
Subtract deductions and credits.
Calculate your expected tax liability using IRS tax tables.
Divide the amount into four equal payments for income that is evenly distributed for the year.
Or income can arrive unevenly during the year, commonly referred to as the Gig Economy. To calculate your payments, you can use Form 2210 found at IRS.GOV as a guide for income that arrives unevenly during the year. In this case, the amount of estimated taxes due will also be uneven. For uneven income the steps are similar to estimating taxes on evenly received income but with different amounts of income and deductions every period, so the calculation needs to be done every time estimated taxes are due.
One way to avoid paying penalties on underpaid or late estimated taxes is to make sure the correct amount of tax is withheld every time you create a taxable event. Your estimated tax bracket and the IRS tax tables can help when making this calculation.
Failing to pay enough or on time throughout the year can result in penalties and interest. Even if you can’t pay the full amount, it’s better to pay as much as possible by the due date to minimize penalties.
Many taxpayers use the “safe harbor” rule to avoid penalties when their income is received evenly throughout the year. These rules are: pay 90% of your current year’s tax liability (may require calculating the tax you owe before you earn the income) or pay 100% of last year’s tax liability (110% if your income was above certain threshold).
Make payments online through the IRS Direct Pay system, through the Electronic Federal Tax Payment System (EFTPS) which requires an account, or by mailing a check with Form 1040-ES. Make sure to keep a record of the date, amount, and account number from which a payment was made to use when doing your taxes.
Estimated taxes can feel overwhelming at first, but planning ahead helps you avoid surprises.