Estimated taxes
Also called quarterly taxes, estimated tax payments
Income tax paid directly to the IRS during the year, usually quarterly, on income that has little or no withholding.
What it means
The U.S. tax system is pay-as-you-go. Wages usually have tax withheld, but self-employment income, freelance work, rental income, investment gains and some retirement income often do not. People with that kind of income are generally expected to make estimated payments, typically due in mid-April, mid-June, mid-September and mid-January of the following year, with dates shifting for weekends and holidays.
Paying too little during the year can lead to an underpayment penalty, which works like interest on the shortfall. Safe harbor rules avoid the penalty if total payments reach a set share of this year’s tax or of last year’s tax, with a higher prior-year share for higher earners. Many states have their own estimated tax rules.
Example
Suppose a freelancer expects to owe $16,000 in federal income and self-employment tax for the year and has no withholding. Splitting it evenly means four payments of $4,000.
How it’s used
- Self-employed people and freelancers
- Investors with large gains or dividends
- Retirees with income that has no withholding
Good to know
- Raising paycheck withholding at a day job can cover tax on side income instead of making separate quarterly payments.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.