Estimated tax payments: What you need to know
February 2, 2023 5 min read
The U.S. has a pay-as-you-go tax system, meaning you’re supposed to pay the appropriate taxes on your income as you earn it. Employers and government agencies generally withhold and pay your income taxes from each of your paychecks or payments.
But if you’re self-employed or have income that doesn’t have tax withholdings, such as investment income, it’s up to you to pay your taxes throughout the year. One way to do that is by making estimated federal and state tax payments.
- You may need to make estimated tax payments if you have income that’s not subject to withholdings.
- If you don’t make the estimated payments, you might have to pay penalties and interest.
- You can use tools to determine how much to pay and then make payments using one of the approved methods.
Who needs to make estimated tax payments?
Income that doesn’t have withholdings taken out and could require you to make estimated payments might include:
- Self-employment income from a business you own or freelance work. You could have this type of income if you have a side gig or consulting job and receive a Form 1099-NEC.
- Interest income, like interest from bank accounts, certificates of deposit and sign-up bonuses for new bank accounts.
- Capital gains from selling stocks and other assets.
- Other income that you didn’t consider when filling out your Form W-4 for an employer.
You may need to make estimated tax payments if, after subtracting your withholdings and tax credits for the year, you expect you’ll owe $1,000 or more when your return is filed. There are also implications related to previous tax years. You can learn more about how the IRS views estimated taxes by visiting its website. It has information on how to calculate estimated taxes, how to pay them and when to pay them.
Estimated tax payments for tax extensions
You may also need to make estimated tax payments if you file for a tax extension. A tax extension only gives you more time to file your return, which can help you avoid a failure-to-file penalty. But you still owe your estimated tax payments by the filing deadline, which is April 18 in 2023. If you don’t make tax payments by the deadline, you could still owe failure-to-pay penalties and interest on the penalty amount and the amount you owe.
When are estimated tax payments due?
Estimated tax payments are due four times each year:
- April 15 for income from January 1 to March 31
- June 15 for income from April 1 to May 31
- September 15 for earnings from June 1 to August 31
- January 15 for income from September 1 to December 31 of the previous year
If the payment due date is on a weekend or legal holiday, you have until the next business day. You can also choose a payment schedule that works for you rather than waiting until the deadline. For example, you might prefer to make smaller payments every other week or every month to better align with when you receive the income.
Differences between state and federal estimated tax payment due dates
Unless you’ve lived and worked only in states that don’t have income taxes, you may also have to make estimated state tax payments. The payment deadlines and options for those don’t always align with what happens at the federal level. You can review state requirements and terms to learn more.
Calculating estimated tax payments
You can use Form 1040-ES or 1040-ES(NR) to figure out your estimated tax payments for the year. You’ll need to know your estimated taxable income, adjusted gross income (AGI), credits, deductions and how much you’ve already paid in estimated taxes for the year.
Figuring all this out can be difficult if your financial situation changes from one year to the next. Or if you experience a major life event that impacts your taxes, like getting married or having a child. An accountant or tax preparation software may be able to help you figure out how much you should pay each quarter.
Tax payment calculators
You can use the IRS tax withholding estimator to help walk you through the process of estimating your withholdings and refund and choosing an estimated payment amount.
Get It Back, a nonprofit project to help people get tax credits and free tax assistance, has an estimated tax payment calculator that can also be helpful if you have self-employment income and your AGI is under $150,000. It says that you’ll generally need to make about $5,000 in self-employment income to reach the $1,000 in taxes owed threshold that could trigger the estimated tax payment requirement.
How to make estimated tax payments
There are various ways to make federal estimated tax payments:
- Online for free with IRS Direct Pay, your IRS Online Account, the Electronic Filing Tax Payment System or the IRS2Go app using your bank account.
- By using a debit card, credit card or digital wallet to make estimated tax payments through an approved payment processor. There may be a payment processing fee.
- Over the phone by calling one of the payment processors.
- With cash or a peer-to-peer payment app, using one of the IRS’ payment processors and a retail partner. Fees may apply.
- By mailing a check or money order and your Form 1040-ES to the correct IRS office.
- Using a wire transfer from your bank or credit union.
You can choose whichever option is most convenient and least expensive for you, and you can schedule your payments ahead of time if you’re worried you might forget. Keep a copy of the payment confirmation for your records.
How much is the penalty for not paying estimated taxes?
The IRS could charge you an underpayment penalty plus the amount you owe if you don’t make your estimated tax payments on time. The IRS charges a failure-to-pay penalty of 0.5% of your underpayment amount each month, up to a cap of 25% of your unpaid taxes. You can also be charged interest based on the IRS’ current interest rate, which was raised to 7% on January 1, 2023.
Estimated tax payments in a nutshell
Estimated tax payments can help you keep up with the ongoing taxes you owe, which can be important if you have nonemployment income or your employer isn’t withholding enough. Falling behind could lead to penalties and interest and a larger-than-expected tax bill when you file your annual tax return. To avoid other tax penalties or fees, you can read more about how to file taxes.