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Quarterly Estimated Tax Payments: Who Needs to Pay Them, When, and Why

If you own a business or earn money as a freelancer, you’ll need to make estimated tax payments every quarter to avoid penalties and interest. Here’s how.

Quarterly Estimated Tax Payments

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    Since most people are paid by salary, their employer withholds income tax. But for millions of taxpayers who are either self-employed or have substantial non-wage income, there’s usually no automatic withholding method.

    For these taxpayers, it’ll be necessary to pay quarterly estimated tax payments. Figuring out your quarterly tax payments isn’t always easy, but it’s important. If you avoid them, you’ll be hit with a huge fee come tax time.

    Who has to pay quarterly taxes?

    Generally speaking, quarterly estimated tax payments need to be made by anyone who does not have withholding tax taken out on their income. Most people who are salaried and receive a W2 are subject to income tax withholding. They don’t usually need to make estimated tax payments.

    Quarterly estimated tax payments are most typical for the self-employed. But there are other income sources that might require estimated payments, including:

    • Substantial investment income.
    • Significant retirement income.
    • You receive a large income windfall, such as from the sale of a major asset.
    • Alimony income.
    • Income distributions from a partnership or Subchapter S Corporation.

    Even if you have a regular salary with tax withholding, you may need to set up estimates to cover the tax liability on any of these additional income sources.

    Why do some people have to pay quarterly taxes?

    Income received from just about any source is generally subject to income tax. That can include not only federal income tax, but also state income tax, and Social Security and Medicare tax.

    The IRS requires that at least most of your tax liability is paid before the tax due date. While this is automatically accomplished through regular withholding, it must be done through quarterly estimated tax payments where withholding isn’t available.

    When are quarterly taxes due?

    Quarterly estimated tax payments are due four times each year. The payment due dates are as follows:

    • April 15 – for January, February and March.
    • June 15 – for April and May.
    • September 15 – for June, July and August.
    • January 15 of the following year – for September, October, November and December.

    You can pay for your estimated taxes if you have an over-payment from the previous tax year.

    For example, let’s say you’re required to make quarterly payments of $4,000 each. But you have a $3,000 over-payment from the previous tax year. You can elect to have the refund applied to your first tax estimate. That means your first tax estimate, due on April 15th, will be reduced to just $1,000.

    It’s even possible to have an overpayment applied to multiple estimates. For example, let’s say your over-payment for the previous year was $10,000. You can apply that to the first two estimates, at $4,000 each, and the remaining $2,000 to the third estimate.

    You can even have the over-payment equally distributed across all four estimates. A $4,000 over-payment can be used to reduce each of the four payments by $1,000.

    How to pay quarterly taxes

    Divide your tax liability by four

    Quarterly estimated tax payments are usually determined when you file your tax return for the previous year. Generally speaking, you’ll divide your tax liability for the previous year by four, and the net result will be your estimated payments for each quarter.

    This is typically done automatically by either a professional tax preparer, or a tax preparation software plan.

    As you can see through the IRS form, figuring out your own quarterly payments is incredibly difficult. That’s why we recommend using tax software (see below).

    Pay by check

    If you make your payments by check, you can do so using IRS Form 1040-ES.

    Pay online

    A much easier method is to use IRS Direct Pay. This is an online payment method provided by the IRS. If you pay from your bank account, there is no fee.

    If you pay by credit card, the IRS will refer you to an approved pay system. There will be a fee for using this method. It can range from a flat fee of $2.59 per payment, to up to two percent of the amount paid. It will add to the outlay of the estimates, so it’s best to pay through your bank if you can.

    Form 1040-ES

    Paying quarterly taxes can be complicated. Our advice, if you’re at all unsure about what to do, is to contact a tax preparer, or use a tax software (more on this below).

    The whole process is 15 steps and you can find the step-by-step instructions on Form 1040-ES.

    What happens if you don’t pay quarterly taxes?

    There are two primary outcomes:

    You’ll have a large tax liability when you file your taxes

    Let’s say you earned $60,000 from your job, but you also had an additional $30,000 in income from investments. You may have had sufficient tax withheld from your employment income, but not from your investment income. The investment income may result in an additional tax liability of, say, $7,000.

    Since you didn’t have withholding on that income, you’ll be forced to come up with $7,000 when you file your tax return. Unless you have the money sitting in a bank account somewhere, that could lead to a mad scramble at the last minute.

    You’ll have to pay interest and penalties on the underpaid tax liability

    Even if you can pay the extra tax due, you may have to pay interest and penalties. For 2018, the IRS will assess interest at an annual rate of four percent on the amount of the underpayment. However, the rate will apply from the date the liability was incurred, not the date you filed your return.

    If you’re unable to pay the full amount of your tax liability by the filing deadline, they could also assess a penalty of one-half percent per month on the unpaid balance.

    The penalty will not be imposed if any of the following occur:

    • You owe less than $1,000.
    • Your withholding and estimated taxes paid were at least 90 percent of the current year tax liability, or 100 percent of the prior year liability, whichever is smaller.

    Software that makes paying quarterly easier

    If your tax return is prepared either by a paid tax preparer or you use tax preparation software, you’ll be supplied with both a schedule of quarterly estimated tax payments, as well as 1040-ES coupons to include with your payment (if you plan to pay by check).

    The IRS also enables you to sign up for their Electronic Federal Tax Payment System (EFTPS), which will allow you to make your payments electronically. The service is free to use, and you can even schedule your estimated payments up to 365 days in advance.

    We recommend TurboTax or H&R Block, both of which offer comprehensive self-employed tax options, but here’s a comparison of a variety of tax software:

     
    TurboTax
    Liberty Tax Online
    H&R Block
    TaxAct
    E-File
    Free Version?
    For simple tax returns
    Not offered
    For simple tax returns
    For simple tax returns
    For simple tax returns
    Other Plans
    Deluxe: $39.99
    Premier: $59.99
    Self-employed: $89.99
    Basic: $34.95
    Deluxe: $54.95
    Premium: $79.95
    Deluxe: $22.49
    Premium: $37.49
    Self-Employed: $59.99
    Basic: $11.96
    Deluxe+: $30.95
    Premier+: $46.36
    Basic: Free
    Deluxe: $24.95
    Premium: $34.95
    Import Return from Competitor
    Yes, by PDF
    Yes
    Yes
    Yes, from TurboTax & H&R Block
    N/A
    Customer Support
    24/7 Live Support
    Chat & email
    Live chat & phone support
    Email or phone
    Email
    Business Features
    QuickBooks interface
    Create W2s & 1099s
    Separate plan to prepare business returns for partnerships
    N/A
    Create W2 & 1099 forms
    File employer tax returns
    Prepare Forms 1065 (Partnerships)
    1120 (C Corps)
    1120S (S Corps)
    N/A
    Refund Tracking
    Yes
    Yes
    Yes
    Yes
    N/A
    Audit Assistance
    Free Guidance + Premium Representation ($44.99)
    Assistance only
    no direct representation
    Free in-person audit support
    Assistance only
    no direct representation
    Direct representation at no extra charge
    Learn More

    Summary

    Filing your taxes can be complicated, doubly so if you’re self-employed and need to file quarterly taxes. We’ve covered everything you need to know, but we recommend going through a tax software or a tax preparer.

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    About David Weliver

    David Weliver is the founding editor of Money Under 36. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

    Comments

    We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 36.

    1. Symantha says:

      Hi,

      Well it depends on who you talk to? taxes are due the following year April 15 – so why pay quarterly when the total bill is due April 15th – make $$$ on your own $$$ why give it to them early?

    2. Eric says:

      There are some things that should be added or reworded.

      First, the Quarterly Estimates Due Dates are different year to year based on when the 15th falls on. For example, the first date in 2011 is due on April 18th instead of the 15th.

      Second, “annual 8% in interest on the unpaid tax liability for every day the payment is late..” should be reworded in my opinion.

    3. MoneyMateKate says:

      I’ve been self-employed for 5 years now, and I never remember to send in my quarterly estimated tax. Last year I sent in the first one but not the following three, but my accountant forgot I told him that and had to redo them…so I know that the difference in penalties and interest between making the first payment on time and no others v. no payments at all: $29 v. $79.

    4. Frugalchick says:

      Thanks for the good info. I’m thinking of starting a small business so I’ll probably need to make quarterly estimated tax payments once I get started.

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