Quarterly Estimated Taxes: Who Needs to Pay & How to Avoid Penalties

Quarterly estimated taxes are a critical part of tax planning for self-employed individuals, freelancers, and business owners. If you don’t have taxes automatically withheld from your income, you may need to make these payments throughout the year to stay compliant with the IRS. Failing to pay on time can result in penalties and unexpected tax bills. 

Here’s everything you need to know about who needs to pay, how to calculate estimated taxes, and strategies to avoid costly mistakes.

Who Needs to Pay Quarterly Estimated Taxes?

You may be required to make quarterly estimated tax payments if you:

• Are self-employed, a freelancer, or an independent contractor with no employer withholding taxes on your behalf.
• Own a small business that does not withhold payroll taxes on income.
• Have investment income, rental income, or other untaxed earnings beyond W-2 wages.
• Expect to owe at least $1,000 in taxes when filing your annual return.

Exceptions: If you are a W-2 employee and have sufficient tax withholding through your paycheck, you likely do not need to make estimated payments. Use the IRS Tax Withholding Estimator to determine if adjustments are necessary.

How to Calculate Your Quarterly Estimated Tax Payments

The IRS requires estimated tax payments to be made four times a year based on your projected earnings. Here’s a simple way to calculate them:

1. Estimate Your Taxable Income – Add up all expected income sources, including self-employment, side gigs, and investments.
2. Determine Your Tax Liability – Use your previous year’s tax return as a reference or apply the current federal tax rates.
3. Factor in Deductions & Credits – Consider tax deductions (home office, business expenses, etc.) and credits to reduce your taxable amount. Check out our guide to small business tax deductions for a deeper look at what you can claim.
4. Divide by Four – Once you have your estimated tax amount, divide it into four equal payments for each quarterly deadline.

For a detailed breakdown, check out the IRS’s Form 1040-ES, which provides worksheets to help calculate payments.

Quarterly Estimated Tax Payment Deadlines

The IRS expects payments on the following dates each year:

• April 15 – for income earned January 1 – March 31
• June 15 – for income earned April 1 – May 31
• September 15 – for income earned June 1 – August 31
• January 15 (next year) – for income earned September 1 – December 31

Missing a deadline can result in penalties, so it’s important to mark these dates in your calendar and plan ahead.

How to Avoid Penalties on Quarterly Estimated Taxes

The IRS imposes penalties if you underpay or fail to make estimated tax payments. Here’s how to stay compliant:

• Pay at least 90% of your current year’s tax liability or 100% of last year’s tax liability (110% for high earners) to avoid underpayment penalties.
• Use a tax planning tool like IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) to automate payments.
• Adjust tax withholdings if you also have W-2 income, ensuring enough is withheld to cover taxes owed.

Final Thoughts

Quarterly estimated taxes don’t have to be a headache. By understanding who needs to pay, how to calculate your payments, and planning ahead, you can avoid penalties and stay on top of your tax obligations. 

If you need guidance, our Plano, TX based-team offers expert tax planning and advisory accounting services to help you navigate quarterly estimated tax payments with confidence and stay compliant year-round.