For those who pay quarterly taxes—or those who don't, but think they should—knowing who pays and when estimated taxes are due may help you throughout the year.
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What are quarterly estimated taxes?
The U.S. uses a pay-as-you-go tax system. This means you need to pay most or all of your tax bill during the year as you receive income. You shouldn’t wait until the end of the year or when you file your taxes to make a payment.
If you work as an employee, your employer likely withholds this money automatically for you and sends it to the Internal Revenue Service (IRS). If you’re self-employed, you likely need to make quarterly estimated tax payments.
Missing estimated quarterly tax payment deadlines may result in penalties and interest.
• Estimated taxes are paid by people and businesses for the amount they expect to owe during the tax year, split into four quarterly payments
• The estimated amount that you need to pay is based on the amount of tax from the prior year and how much you might owe for the current year
• If you don’t have taxes automatically withheld from your income, you generally must pay estimated taxes if you expect to owe more than a certain amount of tax
• You credit the amount of estimated taxes you paid when preparing your tax return against your tax bill, either triggering a tax refund (or carryover to the following year) if you overpaid or an amount owed if you underpaid
• Not paying enough and at the correct time may result in penalties and interest
Who should pay quarterly estimated taxes?
If you don’t have taxes withheld from your pay by an employer and expect to owe $1,000 or more in taxes for the year, you typically need to pay quarterly estimated taxes.
Generally, if you’re self-employed or have your own business, you’ll need to make quarterly estimated tax payments unless you have taxes withheld from another source.
If you’re an employee and receive a Form W-2 each year from your employer as your only form of income, you likely don’t need to worry about filing quarterly tax payments as long as sufficient tax is withheld from your paycheck.
On the other hand, if you’ve received taxable income from sources like these below, you may need to make quarterly tax payments:
- Retirement accounts
- Large windfalls from activities like the sale of a property for a gain
- Income distributions from a partnership, LLC or S Corporation
Additionally, you may need to make estimated tax payments because you work as an independent contractor on the side. Alternatively, you can increase your withholding by filing an adjusted W-4 through your employer to account for the extra tax you might owe based on the additional income.
Do you owe quarterly estimated taxes?
Generally, if you expect to owe $1,000 or more in taxes for the year—over and above the amount withheld from your paycheck, you should pay estimated quarterly taxes.
TurboTax Tip: The amount of estimated tax you must pay depends on your prior year adjusted gross income. You may need to pay as little as 100 percent of last year’s tax liability but as high as 110 percent.
The amount of tax you must pay depends on your adjusted gross income:
- If your prior year Adjusted Gross Income was $150,000 or less, then you can avoid a penalty if you pay either 90 percent of this year's income tax liability or 100 percent of your income tax liability from last year (dividing what you paid last year into four quarterly payments). This rule helps if you have a big spike in income one year, say, because you sell an investment for a huge gain or win the lottery. If you withheld enough taxes from your wages for the current year equal to the amount of tax you owed in the previous year, then you wouldn't need to pay estimated taxes. This applies no matter how much extra tax you owe on your windfall.
- If your prior year's Adjusted Gross Income was greater than $150,000, then you must pay either 90 percent of this year's income tax liability or 110 percent of last year's income tax liability.
Note: If you are a farmer or a fisherman, refer to IRS Publication 225: Farmer's Tax Guide for the special rules that apply to your situation.
Myths about estimated quarterly taxes
Now that we know more about what quarterly estimated taxes are, who has to pay them and how they work, we will address some estimated quarterly taxes myths. There’s a lot of misinformation and misconceptions around estimated quarterly taxes, these can help you understand them, and avoid costly penalties for underpayment of your estimated tax.
Myth 1: You can pay your taxes in a lump sum at the end of the year
One of the more serious misconceptions taxpayers often have is that they can just pay their estimated taxes in one lump sum at the end of the year. It's a mistake to think the IRS is OK with an end-of-year payment.
- If you owe more than $1,000, the IRS wants you to pay your tax throughout the year.
- Any missed quarterly payment will typically result in penalties and interest.
- Waiting until the end of the year to file and pay taxes may lead to other financial issues if you fail to reserve enough funds to satisfy your tax debt.
We cover how to pay quarterly estimated taxes here.
Myth 2: Missing a estimated quarterly taxes payment deadline is fine as long as you pay on the next deadline
If you have to make estimated tax payments, following the schedule is important.
- Missing quarterly deadlines, even by one day, can mean accruing penalties and interest.
- If you miss a payment deadline, your best bet is to send your payment as soon as you can.
- You can also appeal any IRS penalties. The IRS would rather collect tax payments than collect penalty payments, so penalties you incur might be forgiven.
Myth 3: You don’t need to report tip income
Tips are taxable just like wages. Tips can include cash left by customers, amounts from debit or credit card purchases, and pooled tips distributed by your employer or shared with other employees.
However you receive your tip income, you need to report it if they exceed $20 per month. You can keep a daily record of tips with Form 4070. Receiving tip income can cause you to owe more tax than is accounted for on your W-2 requiring the need to make estimated tax payments.
Myth 4: Your taxes are the same whether you’re employed by someone else or self-employed
As an employee, your employer typically pays half of the employment taxes on income you earn during the year. This means they pay half of your Social Security and Medicare taxes while you pay the other through tax withholding from each paycheck.
If you are self-employed, you must account for both halves of the self-employment tax because you are both the employee and employer. The good news is that you can deduct half of the amount you pay in self-employment tax from your income on your Form 1040. For example, $3,000 in self-employment tax reduces your taxable income by $1,500. In the 22% tax bracket, that would mean an income tax savings of $330.
Myth 5: You don’t owe taxes on side hustles
This is an estimated quarterly taxes myth because the IRS requires you to pay taxes on all sources of income unless they’re specifically excluded. Earning money outside of a formal job where you receive a W-2 typically isn’t one of those excluded income sources.
If you earn money from a side hustle or working as an independent contractor, you might need to pay quarterly estimated taxes on this income. This income should be reported to you on a Form 1099-NEC after the tax year. You will use this information to prepare your Form 1040 tax return. You need to prepare a Form W-9 to report your personal information to any company you performed services for or that you sold products for on their behalf.
Myth 6: You don’t need to pay taxes if your clients don’t provide you with a 1099
If you earned under $600 during the tax year from a client, your clients typically aren’t required to issue you a Form 1099-NEC.
This doesn’t mean you don’t have to report this income on your tax return. If you are a freelancer or work as an independent contractor, you must still report this income on Schedule C of your Form 1040.
You can keep track of this income through using accounting software to track all of your income and expenses.
Myth 7: If you have income reported on Form 1099-NEC, the IRS may not have received a copy and therefore you don’t need to pay tax on it.
Some people believe that if they receive a Form 1099, it does not necessarily mean the IRS received a copy. That scenario, however, is highly unlikely. If you received a 1099, the IRS most likely received one, as well.
Myth 8: If you overpay your estimated taxes, you forfeit this money.
When you pay your estimated taxes and this results in overpaying your taxes for the year, this money isn’t lost. Instead, you have two options for how to handle this overpayment:
- You may request the IRS send you this balance as a tax refund
- Have the overpayment apply to your estimated taxes in the current tax year
What are the quarterly tax due dates?
The IRS has established four due dates for paying estimated taxes throughout the year. Typically, the due date is the 15th for each of the months in which payments must be made. If the 15th falls on a weekend or a federal holiday, however, the due date is moved to the following business day.
The IRS refers to these as quarterly taxes, but the due dates don’t necessarily fall within “quarters” nor represent 3 months per payment. For the first payment, it covers 3 months, the second only covers 2 months, while the third payment covers 3 months and the fourth covers 4 months.
You should submit your quarterly timelines according to the following IRS quarterly estimated tax timeline:
- For income received Jan. 1 through March 31, estimated tax is due April 18, 2022.
- For income received April 1 through May 31, estimated tax is due June 15, 2022.
- For income received June 1 through Aug. 31, estimated tax is due Sept. 15, 2022.
- For income received Sept. 1 through Dec. 31, estimated tax is due Jan. 17, 2023.
A payment not postmarked on or before the due date will be considered late and you will likely be penalized.
What happens if you don’t make the payments?
If you owe more than $1,000, the IRS wants you to make payments throughout the year as you go. If you fail to pay enough income taxes through withholding or quarterly estimated taxes, you may encounter a penalty for underpayment.
Further, you may be charged a penalty if your estimated tax payments are late, even if you should receive a refund when you file your tax return.
It’s best to pay your taxes on time throughout the year according to the estimated tax payment schedule.
If you work as a farmer or fisherman or qualify as a certain higher income taxpayer, there are special rules for estimated tax payments. If at least two-thirds of your gross income for 2020 or 2021 is from farming or fishing, you only need to pay 66.6 percent of the tax to be shown on your 2021 return instead of 90 percent.
How to determine estimated amounts
When determining how much estimated tax you’ll owe, you need to create a good estimate of your income and deductions you’ll claim on your federal income tax return.
An easy solution to avoid paying a penalty is simply looking at your previous year’s return to determine how much income tax you paid. Depending on your income, you should make sure your estimated tax payments amount to either 100 or 110 percent of your previous year’s taxes depending on your income level. This will help to avoid any underpayment penalties.
You should also keep track of payments you make throughout the year to account for how much tax you’ve already paid and how much you still owe.
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