The short answer: When you work for yourself, no one takes tax out of your pay, so you send the IRS payments during the year instead. These are called estimated taxes, and they are usually due four times a year. Paying enough, on time, helps you avoid a penalty and a big surprise in April.
Who needs to pay them
Generally, if you expect to owe tax of a certain minimum amount after subtracting withholding and credits, you need to make estimated payments. That includes many sole proprietors, freelancers, partners, S corporation owners and landlords. If you also have a job with withholding, you can sometimes raise your withholding instead of paying quarterly. Ask us which fits you.
When payments are due
There are four payment periods, and the due dates are roughly mid-April, mid-June, mid-September and mid-January of the following year. When a date falls on a weekend or holiday, the deadline moves to the next business day. The periods are not equal quarters, which surprises people.
Your state may have its own estimated payments and dates too, so do not assume the federal schedule covers it.
How to figure out what to pay
There are two common ways to get close.
- Pay based on last year. The IRS has “safe harbor” rules. In general, if you pay enough to cover a set percentage of last year’s total tax, you will not owe an underpayment penalty, even if this year turns out bigger. This is the easiest method. It is a good fit when your income is steady, and the percentage is higher for higher earners.
- Pay based on this year. You estimate this year’s income, subtract expenses, work out the tax, and pay a set percentage of it in installments. This is better when your income has changed a lot, either up or down.
A rough rule many people use is to set aside a share of every payment you receive in a separate account, so the money is already there when a due date arrives. We can help you pick a share that fits your numbers.
Don't forget self-employment tax
Your estimates should cover both income tax and self-employment tax. People often remember the first and forget the second.
How to pay
The IRS accepts payment online, by mail with a payment voucher, and through other IRS-approved options. Keep a record of each payment: the date, the amount, and whether it was federal or state. We need that list at tax time.
What if I miss one or pay too little?
You may owe a penalty, which is a form of interest on the shortfall for the days it was late. It is usually better to catch up as soon as you notice than to wait. And if your income changes midyear, adjust the next payment. You are allowed to change your mind.
A simple example
Say you filed last year and the total tax on that return was a certain amount. A simple approach is to divide the amount you need to cover by four and plan a payment for each date. Now say this year you landed a big new client in the spring. Your income is clearly heading higher than last year, so you may want to pay more than the minimum from that point on. Small adjustments during the year are far easier than one big payment in April.
Make it automatic
The easiest way to stay current is to move money into a separate savings account every time you get paid. When a due date arrives, the money is already sitting there. It also keeps you from spending tax money on something else without noticing.
Common mistakes
- Paying nothing in the first half of the year because income was slow, then having a strong second half
- Forgetting the state payment
- Using last year’s number when income has jumped
- Not keeping a record of what was paid
Your next step
Not sure what to send? Request your tax organizer and we will help you set a plan for the year. See what we do for self-employed clients or browse the Business & Self-Employed overview.