Your Guide to Quarterly Estimated Tax Payments

The clock is ticking! If you're self-employed, a freelancer, a small business owner, or have significant income from sources other than a regular job (such as investments or rental income), you’ll likely need to make quarterly estimated tax payments throughout the year.

Feeling a little lost? Don't worry! This post will break down what quarterly estimated tax payments are, why they're important, and the different ways you can make your payment.

What exactly are quarterly estimated tax payments?

When you work a traditional W-2 job, your employer withholds taxes from each paycheck and sends them to the Internal Revenue Service (IRS) on your behalf. But if you're earning income that doesn't have automatic withholding (or not enough withholding), you're responsible for sending those tax payments to the IRS yourself throughout the year.

These are “estimated” payments because you're projecting what you'll owe for the year and paying it in installments. This “pay-as-you-go” system helps you avoid a massive tax bill (and potential penalties) when you file your tax return.

Who needs to pay estimated taxes?

You generally need to pay estimated taxes if:

You're an individual, including a sole proprietor, partner, or S corporation shareholder, and:

• You expect to owe at least $1,000 in tax for the year after subtracting your withholding and refundable credits, and
• Your withholding and credits will cover less than 90% of your current year's tax liability, or less than 100% of your prior year's liability (110% if your AGI was over $150,000).

You're a corporation and:

• You expect to owe at least $500.

You receive income from sources such as:

• Self-employment (freelancing, gig work, independent contracting).
• Small business profits.
• Dividends or interest.
• Capital gains.
• Alimony (for divorce or separation agreements executed before 2019).
• Rental income.
• Prizes or awards.

NOTE: Even if you have a W-2 job, you might still owe estimated taxes if you have substantial side income or if not enough tax is being withheld from your paycheck.

Related: S-Corp Tax Strategies for Physicians: Maximizing Tax Savings

Why bother? (Hint: Penalties!)

The IRS wants its money throughout the year, not just in one lump sum. If you don't pay enough tax through withholding and/or estimated tax payments, you may be charged an underpayment penalty. Paying quarterly helps you stay on top of your obligations and avoid this unwanted surprise.

This penalty isn't just about whether your total payments for the year add up to cover your entire tax bill. You can actually get dinged with a penalty for underpaying in a specific quarter, even if you catch up and pay everything you owe for the whole year by tax day. (This happened to me!) 

The IRS looks at each payment period separately. They want to see you paying your share consistently as you go, not just playing catch-up at the very end. So, making those quarterly payments is key to avoiding an unexpected penalty.

Figuring out how much to pay: Vouchers, estimates, and staying ahead

So, how much should you actually send in for these quarterly payments? It can feel like a guessing game, but here are a couple of common approaches:

Using your payment vouchers (the “safe harbor” route)

If you filed your taxes last year using tax software or with a tax professional, you might have received Form 1040-ES payment vouchers. These vouchers often have pre-calculated payment amounts.

These amounts are typically based on your previous year's income and tax liability. Paying at least this amount (or 100% of your prior year's tax, 110% if your AGI was over $150,000) generally puts you in “safe harbor,” meaning you'll likely avoid an underpayment penalty, even if you end up owing a bit more when you file.

This is a good baseline, especially if your income is relatively stable.

Estimating based on current/expected income (aiming for zero owed)

What if you expect your income to be significantly higher this year than last? Or perhaps you just want to avoid owing any tax when you file your annual return, not just avoid penalties.

In this case, relying solely on last year's numbers might not be enough. You'll need to estimate your total income for the current year and calculate your tax liability based on that.

A common rule of thumb (but use with caution!)

While it varies greatly based on your individual tax situation (deductions, credits, filing status, specific state laws), some people proactively set aside:

• 35% to 40% of their estimated net self-employment/business income for federal taxes.
• 5% to 10% for state taxes (this can vary wildly by state — some have no income tax, while others are higher).

The strategy

If you use this percentage method, the idea is to aim a bit high for the first couple of quarters. Then, you can review your income and payments mid-year (before the Q3 payment) and adjust your remaining quarterly payments up or down if you've over- or underpaid. This helps you fine-tune as the year progresses.

Important considerations

• Your situation is unique, and these percentages are very general. Your actual tax rate could be higher or lower.
• Don't forget your state estimated tax obligations. The rules and rates vary by state, so check your specific state's requirements. In true millennial fashion, I usually recommend opening a Google browser and searching, “[Your state] estimated tax payments”. They often have different portals for businesses and individuals, and you will most likely make the payment under individual. 
• When in doubt, consult a pro. Calculating estimated taxes can be complex. If you're unsure, a tax professional can help you determine the right amount for your specific circumstances and goals.

Mark your calendar: The quarterly due dates

Quarter	Income period	Tax due date
Q1	January 1 – March 31	April 15
Q2	April 1 – May 31	June 15
Q3	June – August 31	September 15
Q4	September 1 – December 31	January 15 (of the following year)

How to make your quarterly estimated tax payment

The good news is that the IRS offers several convenient ways to pay. Choose the one that works best for you:

IRS Direct Pay (recommended for individuals)

How: Go to IRS.gov/payments. You can pay directly from your bank account (checking or savings) for free. You can also pay with a debit card, credit card or digital wallet (third-party fees may apply for card payments).

Pros: 

• Quick and easy.
• No registration required. 
• You get instant confirmation.

What you'll need: Your Social Security Number (or ITIN), tax year and bank account information (if paying from a bank). You’ll also need to do an identity verification by entering your name and address as it appears on your prior year tax return.

Here is a breakdown of each step in the process:

1. Visit the IRS Direct Pay page.
   • Once you're there, you can pick whether you want to make a payment or check on a payment you already made.
     
2. Enter your tax information.
   • Next, choose why you're making a payment, the kind of payment you're sending, and the year it’s for.
   • Most people pay because they’re on a payment plan, owe money, or need to make estimated tax payments. You'll select “Estimated Tax” as your reason.
   • Then, make sure to apply your payment to your 1040 form and choose the tax year you want it to go toward. Click continue to move on.
3. Verify your identity.
   • The IRS will ask you to fill out a form to confirm who you are. Choose a tax year to help verify your identity. It doesn’t have to be the current year or the one you’re paying for, but it must be 2019 or later.
4. Enter your payment information.
   • Next, you’ll be asked to enter three things: how much you’re paying, your bank details, and your email address.
   • Pick the amount you want to pay and the date you want the IRS to apply the payment. This might not be the same day the money leaves your account. You can choose today’s date or the tax deadline.
   • Then, enter your bank account info and choose whether it’s a checking or savings account.

Electronic Federal Tax Payment System (EFTPS):

How: Visit EFTPS.gov. This is a free service from the U.S. Department of Treasury. You can schedule payments in advance.

Pros:

• Secure.
• Allows scheduling.
• Good for businesses and individuals who pay frequently. 
• You can view payment history.

Cons: 

• Requires enrollment, which can take a few days to process as they mail you a PIN. So, if the tax deadline is close, this might not be the best option for your first payment.

Mail (check or money order):

How: Make your check or money order payable to the “U.S. Treasury.” Include your name, address, phone number, Social Security Number (or EIN for businesses), the tax year, and the relevant form number (e.g., “2024 Form 1040-ES”) on your payment.

Mail it with payment voucher Form 1040-ES (for individuals) or Form 1120-W (for corporations) to the address listed in the form instructions for your state.

Pros: 

• Traditional and familiar to some.

Cons: 

• Slower.
• Risk of mail delays or lost mail. Make sure to mail it well in advance of the deadline using certified mail.

Tax preparation software:

How: If you use tax software to prepare your annual return, many programs also offer services to help you calculate and pay your estimated taxes electronically.

Pros: 

• Convenient if you're already using the software.

Cons: 

• May involve software fees.

Through your tax professional:

How: If you work with a CPA or tax advisor, they can often help you calculate your estimated payments and even make them on your behalf (with your authorization). Due to liability concerns, not all tax professionals do this on behalf of their clients

Pros: 

• Expert guidance and handling.

Cons: 

• Will involve professional fees.

What if I can't pay by the deadline or I missed it?

Don't panic, but do act quickly.

• Pay as soon as you can: The penalty for underpayment is calculated based on how much you underpaid and for how long. Paying sooner rather than later will minimize any potential penalty.
• Pay what you can: Even a partial payment is better than no payment.
• IRS Options: If you can't pay the full amount, the IRS offers payment options like short-term payment plans or an Offer in Compromise, though these are typically for past-due overall tax liabilities, not just a single missed estimated payment.

Your next steps

Quarterly estimated tax payments are a crucial part of managing your tax obligations if you're not having enough (or any) tax withheld from your income. Don't wait to calculate what you owe and choose your preferred payment method.

Staying organized and proactive about your estimated taxes will save you stress and potential penalties down the road. If you're unsure about your obligations or how to calculate your payments, consider consulting with a tax professional.

Disclaimer:This blog post is for informational purposes only and does not constitute professional tax advice. Consult with a qualified tax professional for advice tailored to your specific situation.