If you’re self-employed, a freelancer, or have income not subject to withholding, you might wonder if you need to make estimated federal income tax payments. Even if you have a traditional job, other income sources like rental income, dividends, or capital gains can trigger the need for estimated payments.
Here’s what you need to know to determine whether you should start making estimated tax payments.
What Are Estimated Tax Payments?
Estimated tax payments are periodic payments made to the IRS throughout the year to cover your tax liability. The IRS expects taxpayers to pay taxes as income is earned, not just when filing an annual return.
These payments help avoid penalties for underpayment of taxes and can include not only income tax but also self-employment tax, alternative minimum tax, and more.
When Do You Need to Make Estimated Tax Payments?
You generally need to make estimated tax payments if both of the following apply:
You expect to owe at least $1,000 in tax when your return is filed after subtracting withholding and refundable credits.
Your withholding and refundable credits will be less than the smaller of:
90% of your tax liability for the current year, or
100% of your tax liability from the previous year (110% if your adjusted gross income was over $150,000)¹.
Who Typically Needs to Make Estimated Payments?
Self-employed individuals and freelancers who don’t have taxes withheld from their pay.
Landlords receiving rental income.
Investorsearning dividends, interest, or capital gains.
People with side jobs or gig work that isn’t subject to withholding.
Those receiving retirement income or unemployment benefits without withholding.
How to Calculate Estimated Payments
Estimate your total income for the year, including all sources.
Calculate your expected tax liability using current tax rates and deductions.
Subtract expected withholding and refundable credits.
Divide the remaining tax due into four equal payments, due quarterly (April, June, September, and January of the following year).
Many taxpayers use Form 1040-ES to calculate and submit estimated payments.
What Happens If You Don’t Pay Enough?
If you don’t pay enough tax through withholding or estimated payments, you could face underpayment penalties and interest charges. The IRS expects taxpayers to pay taxes “as you go” during the year.
Can You Avoid Estimated Payments?
If you receive wages or pensions, you can avoid estimated payments by increasing your withholding. You can submit a new Form W-4 to your employer to have more tax withheld from your paycheck.
Tips to Stay on Track
Keep track of all income sources throughout the year.
Use tax software or consult a tax professional for accurate estimates.
Pay estimated taxes on time to avoid penalties.
Review your tax situation mid-year, especially if you have a significant income change.
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