Estimated Tax Payments
Definition
Quarterly tax payments made by self-employed individuals, freelancers, and investors to cover income that isn't subject to withholding, avoiding an underpayment penalty at year-end.
The US tax system is pay-as-you-go — you must pay taxes throughout the year, not just at filing time. Employees have taxes withheld from paychecks, but self-employed individuals, freelancers, landlords, and investors with significant capital gains must make quarterly estimated payments directly to the IRS.
Estimated payments are due April 15, June 15, September 15, and January 15 (for the prior year's Q4). Missing these deadlines triggers an underpayment penalty — essentially interest charged on the amount that should have been paid. The penalty rate changes quarterly and is based on the federal short-term rate plus 3%.
The safe harbor rules help you avoid penalties: pay at least 100% of last year's total tax liability (110% if income exceeds $150,000), or pay at least 90% of the current year's tax. Most people use the prior-year safe harbor because it's simpler — you know exactly what to pay regardless of current-year fluctuations.
Crypto investors face particular challenges with estimated taxes. Large gains realized in Q1 may require a substantial estimated payment by April 15, even if those gains are reinvested. Failing to make estimated payments on crypto gains is a common and costly mistake for new crypto traders.
State estimated taxes may also be required, with schedules that sometimes differ from federal. California, New York, and other high-tax states have their own estimated payment requirements and penalties. Some states allow you to make estimated payments through withholding on W-2 employment income to simplify the process.
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Frequently Asked Questions
Do I need to make estimated tax payments?
If you expect to owe $1,000 or more in taxes beyond what's withheld from paychecks, you should make estimated payments. Common triggers: self-employment income, freelancing, rental income, large investment gains, or retirement distributions. The safe harbor (paying 100-110% of last year's tax) eliminates penalty risk.
How do I calculate estimated tax payments?
The simplest approach: divide last year's total tax by 4 and pay that amount each quarter (110% if income over $150,000). For more precision, estimate this year's income and use Form 1040-ES. Tax software can calculate estimates. Overpaying results in a refund, not a penalty.