Quarterly Estimated Taxes: How to Calculate and When to Pay

Quarterly Estimated Taxes: How to Calculate and When to Pay

If you are self-employed or your business does not withhold enough tax, you are required to make quarterly estimated tax payments to the IRS. Failing to do so results in an underpayment penalty, even if you pay your full balance at tax time.

Who Must Pay Estimated Taxes

You generally must make estimated tax payments if:

1. You expect to owe at least $1,000 in federal tax for the year (after subtracting withholding and credits)
2. Your withholding and credits will cover less than the smaller of 90% of this year's tax or 100% of last year's tax (110% if your AGI exceeded $150,000)

This applies to sole proprietors, partners, S corporation shareholders, and anyone with significant income that is not subject to withholding (rental income, investment gains, etc.).

When Estimated Taxes Are Due

The IRS divides the year into four uneven payment periods:

| Payment Period | Covers Income Earned | Due Date | |---|---|---| | Q1 | January 1 - March 31 | April 15 | | Q2 | April 1 - May 31 | June 15 | | Q3 | June 1 - August 31 | September 15 | | Q4 | September 1 - December 31 | January 15 (next year) |

If a due date falls on a weekend or holiday, the payment is due the next business day.

How to Calculate Your Payments

Method 1: Prior Year Safe Harbor

The simplest approach is to pay 100% of last year's total tax liability, divided by four. If your adjusted gross income exceeded $150,000, pay 110% of last year's tax instead. This guarantees you avoid the underpayment penalty regardless of how much you actually owe this year.

Method 2: Current Year Estimate

Estimate your expected adjusted gross income, deductions, and credits for the current year. Calculate the total tax you will owe, then divide by four. This method requires more work but can result in lower payments if your income is decreasing.

Method 3: Annualized Income Installment Method

If your income is irregular or seasonal, you can use Form 2210 Schedule AI to calculate payments based on income actually earned in each quarter. This prevents you from overpaying in quarters when you earn less.

Calculating the Amount

Here is a simplified calculation:

1. Estimate total income for the year
2. Subtract estimated deductions (standard or itemized)
3. Calculate income tax using the current tax brackets
4. Add self-employment tax (15.3% of 92.35% of net self-employment income)
5. Subtract any credits you expect to claim
6. Subtract any tax that will be withheld from W-2 wages or other sources
7. Divide the remaining amount by 4

Use IRS Form 1040-ES worksheet to walk through this calculation step by step.

How to Pay

• IRS Direct Pay: Free, pay directly from your bank account at irs.gov/payments
• EFTPS (Electronic Federal Tax Payment System): Free, requires enrollment at eftps.gov
• IRS2Go App: Mobile payment option
• Credit or debit card: Processing fees apply
• Check or money order: Mail with Form 1040-ES voucher

Avoiding Underpayment Penalties

The underpayment penalty is calculated on a quarter-by-quarter basis. You can avoid it entirely by meeting any of these tests:

• You owe less than $1,000 at tax time
• You paid at least 90% of this year's tax through withholding and estimated payments
• You paid at least 100% of last year's tax (110% if AGI over $150,000)

If your income varies significantly, track it quarterly and adjust payments accordingly. Overpaying early in the year and underpaying later is better than the reverse, since penalties compound by quarter.

Practical Tips

Set aside 25-30% of every payment you receive into a separate savings account for taxes. Automate your estimated payments through EFTPS so you never miss a deadline. Review your estimates at least once mid-year and adjust if your income has changed significantly.