Who typically needs to make quarterly estimated tax payments?

Individuals with income not subject to withholding—such as self-employment income, rental earnings, or significant investment gains—usually must make quarterly estimated tax payments if they expect to owe a tax balance when filing.

How can I avoid penalties for underpaying estimated taxes?

You can avoid underpayment penalties by meeting safe harbor thresholds (paying a percentage of current-year tax or matching a set portion of last year’s tax), making timely payments, and adjusting estimates if income changes significantly.

Calculating and Paying Your Quarterly Estimated Taxes

If you have other income that’s not subject to withholding—say, investment income, self-employment earnings or rental income—you may need to pay estimated taxes each quarter. These payments allow you to pay your income tax, and in many cases also self-employment tax or similar contributions, throughout the year so that you don’t owe a big bill — not to mention potential penalties — at tax time. This guide will cover who should pay, how to figure it out, when you need to do it and some helpful advice on keeping things organized.

Who usually has to pay estimated taxes quarterly

Individuals and owners of small businesses frequently pay estimated taxes.) In general, if you anticipate owing tax above a certain threshold when you file your return and your withholding (if any) won’t pay that obligation, then quarterly payments are necessary. The common situations would be freelancers, contractors, gig economy earners, people with big investments dividends or capital gains and some types of retirement plan distributions. If you’re unsure, do a rough estimate now of what your annual tax liability might be and put it up against any withholding you expect.

Standard methods for determining estimated payments

There are two Bureau of Internal Revenue income tax formats for quarterly estimated payments:

Method: Annualized or projected Estimate your expected income, deductions, credits and tax liability for the year and then multiply each by four quarters; base estimated tax due on this amount. That is easy if your income is uniform over the course of the year.

Annualized income method: If you earn dramatically different amounts of money in each quarter, the method allows for annualizing your income to figure out what the tax is based on just that portion of the year. This strategy allows you to pay more in high-earning quarters and less in slower ones, reducing the risk that you’ll be overpaying early in the year.

A practical calculation example

Estimate your annual taxable income: Add up the business, interest, dividends and other potentially taxable amounts that’d be included in your gross income during a year, then deduct the deductions and credits you expect to claim.

Calculate estimated annual tax: Multiply the applicable rates of taxes and/or marginal brackets to the estimated taxable income, which gives you an approximate annual tax expenditure payable. Include estimated self employment taxes or other applicable fees, if any.

Step 7: Deduct estimated withholding and credits If you had some related withholding from other income, get a reduction for that from your estimated annual tax.

Calculate quarterly payment: Divide the remaining balance by four to establish a baseline quarterly payment — unless you use an annualized method that recalculates based on income received to date.

Safe harbor and penalties avoidance

To avoid underpayment penalties, many taxpayers rely on safe harbor thresholds: they pay either 90% of the tax in the current year, or pay 100% (or 110% for high incomes) of their last year’s tax liability through withholdings and estimated payments. And to the extent that you meet these safe harbor thresholds by year-end, you generally can sidestep an underpayment penalty, even if you do wind up owing when you finally file your return.

Deadlines and scheduling

Quarterly estimated tax payments have set due dates during the year. Generally, payments are due in mid-April, mid-June, mid-September and mid-January of the following year to mirror typical tax deadlines. Make a note of these dates in the diary with a reminder. Deadlines that fall on a weekend or holiday typically move to the next business day.

How to submit payments

There are a few options for paying your quarterly estimated tax payments. Everything can be done quickly and easily online, so there’s no waiting to call or receiving your verification in the mail… You may still also do Electronic Fund Transfers Online OR by Bank Draft, Mail with Voucher & Check. Be sure you indicate that payment is for the 2019 tax year when making a payment, include proper identifying information to ensure the funds are properly applied.

Recordkeeping and documentation

Keep detailed records of how you figured each payment: copies of worksheets, logs tracking income, invoices and receipts for deductible expenses, confirmation numbers for electronic payments. “It helps for making changes to estimates mid-year, producing accurate annual returns, and proving intent to comply if you get questions,” Fuller said.

Adjusting payments during the year

Life and business changes — so should your estimates. If income has changed substantially, re-calculate projected annual tax and modify future quarterly payments accordingly. Opt for an annualized approach if you expect your earnings to be irregular from quarter to quarter. Adjustments are important to avoid overpaying at the beginning of the year and underpaying later.

Common mistakes to avoid

Underestimating taxable income: Failing to consider investment gains, one-time income or lesser-known types of income can result in an underpayment.

Only using last year’s numbers: Big changes in income mean that last year's tax is a bad predictor.

Deadline woes: If a payment arrives after the due date, interest and penalties may apply, even if the total paid ultimately exceeds the amount owed.

Bad bookkeeping: A dearth of documentation can make it harder to recalculate and may cause trouble if the tax man challenges estimates.

Useful tips to help streamline the process

Develop a rudimentary worksheet for each quarter: Keep an eye on your raw receipts, subtract expenses you can deduct and the net number is what you use to estimate.
Automate reminders: Announce payment due dates ahead of time with calendar alerts.
Think conservatively in the early part of the year: Slight overestimates help lessen the risk of underpayment penalties. If income falls short, you can scale back later contributions.
Save a percentage of each payment in a separate account: This can help to have funds available when payments are due, particularly for those with irregular pay schedules.
Every year, after two quarters of payments, compare the estimated year-to-date remittance with earnings and adjust the remaining schedule if necessary.

When professional help makes sense

If your income is more complicated — you have multiple streams of revenue, significant investments, partnership income or the rules around deductibility are evolving — consulting with a tax professional or adviser can save time and cut down on errors. An expert can help select the best way to calculate it, employ a “safe harbor” approach and arrange for payments in a manner that limits penalties.

Final thoughts

Quarterly estimated payments are an easy way to keep your tax end of the deal private all year ‘round. By estimating your tax for the year, picking a calculation method that corresponds to how you earn income, meeting deadlines and keeping good records, you can minimize surprises at tax filing time — and perhaps even avoid penalties. Review assumptions regularly as your income changes, and include payments as part of your cash-flow planning if you are an individual taxpayer or a small-business owner.