Learn About IRS Estimated Tax Payments

What Are IRS Estimated Tax Payments?

Estimated tax payments are quarterly payments made directly to the Internal Revenue Service (IRS) for people whose tax situations don't allow taxes to be withheld from their paychecks. Unlike traditional employees who have taxes withheld automatically from each paycheck, certain taxpayers must send in taxes four times per year on their own.

The IRS requires these payments because taxes are meant to be paid throughout the year, not all at once when you file your annual return. Without this system, people could end up owing a large amount on April 15th with no prior payments made.

Estimated tax payments typically cover federal income tax, self-employment tax, and alternative minimum tax. Self-employment tax is a Social Security and Medicare tax that self-employed people must pay on their net earnings. For example, a freelance writer earning $50,000 per year would likely owe both income tax and self-employment tax throughout the year.

Several categories of people commonly make estimated payments. Self-employed individuals, including sole proprietors and independent contractors, almost always need to make these payments. Additionally, people with significant investment income—such as dividends, capital gains, or rental property income—may need to make estimated payments if not enough tax is being withheld. Retirees receiving income from pensions, annuities, or distributions may also be required to pay.

Practical Takeaway: Review your income sources during the year. If you don't have an employer withholding taxes for you, or if you have additional income beyond your regular job, you should explore whether estimated tax payments apply to your situation.

Who Must Make Estimated Tax Payments

The IRS has specific rules about who is required to make estimated tax payments. Generally, you may need to make these payments if you expect to owe $1,000 or more when you file your tax return. This $1,000 threshold helps the IRS identify taxpayers who should be paying throughout the year rather than in one lump sum at tax time.

Self-employed people are the largest group making estimated payments. According to the IRS, approximately 16.2 million people file Schedule C (Profit or Loss from Business) forms annually, and many of these individuals make quarterly estimated payments. If you run a business, farm, or work as an independent contractor, you almost certainly need to make estimated payments unless very little income flows from these sources.

Certain high-income earners also make estimated payments. If you have W-2 income from an employer but also earn income from investments, rental properties, or consulting work, you might owe estimated taxes on that additional income. Someone earning $80,000 from a job plus $25,000 from rental properties would need to consider estimated payments for the rental income portion.

Specific situations that often require estimated payments include:

• Freelancers and contractors receiving 1099 forms
• Small business owners with net profits
• People receiving significant dividend or interest income
• Real estate investors with rental income
• Artists, writers, and other creative professionals
• People receiving income from partnerships or S-corporations
• Retirees who haven't had sufficient tax withheld from pension or retirement distributions

The IRS also considers whether you had tax liability in the previous year. If you had zero tax liability the prior year, you generally don't need to make estimated payments in the current year. Conversely, if you had significant tax liability last year and expect a similar situation this year, estimated payments become important.

Practical Takeaway: Calculate your expected tax liability by adding up all income sources and considering deductions. If this total suggests you'll owe $1,000 or more, research estimated payment requirements for your specific situation.

The Four Quarterly Payment Dates and Amounts

The IRS divides the tax year into four quarters, each with its own payment deadline. These deadlines don't align with calendar quarters but rather follow specific dates designed to spread payments throughout the year.

The four payment periods and their due dates are:

• First Quarter (January 1 - March 31): Due April 18, 2024 (dates vary yearly)
• Second Quarter (April 1 - May 31): Due June 17, 2024 (dates vary yearly)
• Third Quarter (June 1 - August 31): Due September 16, 2024 (dates vary yearly)
• Fourth Quarter (September 1 - December 31): Due January 16, 2025 (dates vary yearly)

If a payment deadline falls on a weekend or holiday, the IRS extends the deadline to the next business day. For example, if April 15th falls on a Sunday, the deadline becomes April 17th. The IRS updates these dates annually on its website.

Calculating the payment amount requires estimating your total tax liability for the year, then dividing it into four parts. The IRS Form 1040-ES provides a worksheet to help with this calculation. To estimate, you consider projected income from all sources, subtract anticipated deductions, multiply by your expected tax rate, then divide by four.

Here's a practical example: Sarah is a freelance graphic designer. She estimates her 2024 income will be $60,000 after business expenses. After accounting for her standard deduction and tax brackets, she calculates she'll owe approximately $8,000 in federal income tax and $8,504 in self-employment tax, totaling $16,504. Dividing by four, she would pay approximately $4,126 each quarter.

Payment amounts don't have to be identical each quarter. If you have an uneven income year—perhaps earning more in summer months—you could pay less in some quarters and more in others. However, the IRS has underpayment penalties if your total payments are too low, so most people aim to pay roughly equal amounts.

Practical Takeaway: Mark all four due dates on your calendar now, accounting for weekends and holidays. Use IRS Form 1040-ES to calculate your quarterly payment amount, and set aside funds each month to ensure you can meet these deadlines.

How to Calculate and Submit Estimated Payments

Calculating estimated tax payments requires gathering information about your expected income and deductions. The IRS provides Form 1040-ES, which includes a worksheet to guide you through the calculation process. This form is updated annually and is freely available on the IRS website.

Start by projecting your total income for the year from all sources—wages, self-employment income, investment income, rental income, and any other sources. Be realistic about your expectations. If you've been self-employed for several years, use that historical income as a starting point, adjusting for anticipated changes. First-time business owners should research similar businesses in their area or consult with an accountant.

Next, estimate your deductions. Common deductions for self-employed people include home office expenses, vehicle mileage, supplies, equipment, insurance, and professional services. Keep detailed records from prior years to inform your current estimates. If you take the standard deduction, note that amount—for 2024, it's $13,850 for single filers and $27,700 for married filing jointly.

The IRS Form 1040-ES worksheet then guides you to calculate taxable income and estimated tax liability. You multiply your estimated taxable income by the appropriate tax rate, which varies based on your filing status and income level. For 2024, federal tax rates range from 10% to 37% depending on income brackets.

For self-employed people, remember to include self-employment tax in your calculation. Self-employment tax is approximately 15.3% on 92.35% of your net self-employment income. This covers Social Security and Medicare. The IRS Form 1040-ES includes a separate worksheet specifically for self-employment tax calculations.

Multiple methods exist for submitting estimated tax payments:

• IRS Direct Pay: Pay directly from your bank account free of charge through IRS.