Estimated Tax
What Is Estimated Tax?
Estimated tax refers to periodic tax payments individuals and businesses make to the government throughout the year when taxes are not automatically withheld from income. These payments help cover income taxes and, in many cases, self-employment taxes.
Estimated taxes are commonly required for freelancers, independent contractors, small business owners, and investors who receive income without automatic withholding.
Why It Matters
Estimated tax payments help taxpayers avoid large tax bills and potential penalties when filing their annual tax return.
The IRS requires estimated payments when individuals expect to owe a certain amount of tax that has not been withheld through payroll.
Making regular estimated payments can help manage cash flow and reduce financial surprises at tax time.
How Estimated Tax Works
Estimated tax is typically paid in quarterly installments during the year.
Payments are based on expected income and tax liability.
Common sources of income requiring estimated tax payments include:
- freelance or contractor income
- investment income
- rental income
- business profits
Taxpayers generally calculate their expected tax liability and divide the payments into quarterly installments sent directly to the IRS.
Example
If a freelancer expects to owe $8,000 in taxes for the year and no taxes are withheld from their income, they may make four quarterly payments of about $2,000 to the IRS.
Estimated Tax vs Tax Withholding
Estimated taxes are paid directly by the taxpayer.
Tax withholding occurs when employers automatically deduct taxes from employee paychecks.
FAQs About Estimated Tax
Who must pay estimated taxes?
Individuals who expect to owe taxes that are not covered by withholding may need to make estimated payments.
When are estimated tax payments due?
Payments are typically due four times a year in April, June, September, and January.
What happens if estimated taxes are not paid?
The IRS may charge underpayment penalties.
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