Estimated taxes are payments to the government that some people have to make four times a year. They’re mainly relevant for freelancers and people with nonemployment income.
Employees usually have taxes taken out (or “withheld”) from every paycheck they receive. This helps ensure that the government gets the money it’s due and helps employees receive a smoother, more reliable stream of income (by paying taxes gradually over time).
Nonemployee workers, on the other hand, must make those payments themselves since there is no one withholding taxes for them. Without estimated taxes, freelancers and other nonemployees would face an enormous tax bill each April. Estimated taxes make their obligations more manageable and also help ensure people are paying into the system as they go.
Self-employed people and corporations typically owe estimated taxes, but you can owe for other reasons too. Here’s who is likely to be on the hook:
A good rule of thumb is that you want to make sure you’ve paid at least 90% of your total tax for the year (whether through withholding or estimated payments) before you submit your annual tax return. If your nonemployment income puts you at risk of falling below that 90% mark, then you probably need to file estimated taxes. Otherwise, you could face penalties.
Accurately estimating your quarterly taxes helps you avoid a huge bill when it comes time to file plus potential late fees and penalties.
One simple way to figure out your quarterly taxes is to go by what you earned and owed last year. If you expect your income to be about the same, you can look at what you paid last year and then divide that up over four quarters.
But if your income is changing or you want to be more precise (to avoid overpaying or underpaying), here’s how to figure out how much you owe:
Track your income in a spreadsheet
so that you know how much you earn each quarter
Calculate your deductions
and subtract them from your taxable income
Calculate your income and self-employment tax rates
based on taxable income
Submit your quarterly payments
to the U.S. Treasury and your state treasury
You can avoid the penalties if you pay at least 90% of your current year taxes before you file your tax return, but it’s still a good idea to be as accurate as possible. After all, no one likes a tax bill.
The estimated tax filing deadlines for the IRS are usually:
However, your state’s deadlines may differ from the federal schedule. To be safe, make sure you’re always staying on top of both sets of deadlines.
Doing four extra tax filings a year may not be your idea of a good time. But if you do owe estimated taxes, there are some steps you can take to ease the pain:
If you work for yourself, you probably owe estimated taxes. It’s important to account for your estimated taxes accurately and pay them on time because the penalties, fees, and interest for late payments can add up quickly.