Tax
What Is Estimated Tax?
Definition
Estimated taxes are quarterly tax payments made by self-employed individuals, freelancers, and businesses to cover income tax, self-employment tax, and other taxes that aren't withheld by an employer.
The U.S. tax system operates on a pay-as-you-go basis. Employees have taxes withheld from each paycheck, but self-employed individuals, independent contractors, landlords, and investors with significant income must make estimated payments quarterly. The IRS deadlines are April 15, June 15, September 15, and January 15 of the following year (for the prior quarter). You're generally required to pay estimated taxes if you expect to owe $1,000 or more when you file your return. To avoid underpayment penalties, you must pay at least 90% of your current year's tax liability or 100% of last year's liability (110% if your AGI exceeds $150,000) — this is known as the safe harbor rule. Estimated payments are calculated using Form 1040-ES and cover federal income tax, self-employment tax (15.3%), and any other taxes. Most states with income tax have their own estimated payment requirements with similar quarterly schedules. A common mistake for new freelancers and business owners is ignoring estimated taxes for the first year, then facing a large tax bill plus penalties in April.
Why it matters
Missing or underpaying estimated taxes results in IRS penalties that compound quarterly — and the cash flow surprise of a large year-end tax bill has sunk more than a few small businesses. A tax advisor or accountant can calculate your quarterly payments accurately, set up the safe harbor to avoid penalties, and adjust estimates as your income fluctuates throughout the year.