If you earn income that does not have automatic tax withholding, you must pay estimated taxes. This includes self-employment income, freelance work, rental income, and business profits.
The IRS requires you to make these payments every quarter. Failing to do so can result in costly penalties and interest charges.
Self-employed individuals in the United States contributed over $505 billion in self-employment taxes (IRS, 2022). Independent workers do not have taxes deducted from their earnings. Therefore, quarterly tax payments are essential to staying compliant and avoiding financial strain.
This guide will walk you through who needs to pay estimated taxes, how to calculate payments, and how to avoid penalties. This article will help you manage your tax obligations efficiently and keep more of your income.
Figuring when and how to pay
Do i need to pay estimated taxes?
You must make quarterly estimated tax payments if you:
- Expect to owe at least $1,000 in taxes after subtracting withholdings and refundable credits.
- Earn self-employment income (freelancers, contractors, gig workers).
- Have investment income, rental income, dividends, or side business earnings.
- Work as a small business owner or sole proprietor.
- Receive income from a partnership or S-corporation that does not withhold taxes on your behalf.
Who doesn’t need to pay estimated taxes?
You don’t have to pay estimated taxes if you:
- Are a W-2 employee and your employer withholds enough taxes from your paycheck.
- Had no tax liability in the previous year (meaning you didn’t owe taxes after credits and deductions).
- Expect your total tax bill to be less than $1,000 after deductions and withholdings.
If you work part-time as a freelancer but also have a W-2 job, you may be able to adjust your W-2 withholdings to cover your self-employment taxes instead of making separate estimated payments.
Which option should I choose?
The IRS provides two main methods for calculating estimated tax payments:
1. Safe harbor method
- Pay 100% of last year’s tax liability (or 110% if your adjusted gross income was over $150,000).
- This ensures you won’t be penalized for underpayment, even if your actual tax liability is higher this year.
- Best for: Individuals with stable income who prefer a predictable tax payment strategy.
2. Current year method
- Pay 90% of your estimated tax liability for the current year based on your actual earnings.
- This method adjusts payments as your income changes but requires regular tracking.
- Best for: Freelancers, business owners, and gig workers with fluctuating income.
Pro tip: If you are unsure which method to use, consulting with a tax professional or using Invoice Fly’s reporting software can help you analyze past tax data and make an informed decision.
How should I figure out what I owe?
Follow this four-step formula to estimate your quarterly tax payments:
1. Estimate your total taxable income
Include all earnings from self-employment, dividends, rental properties, and any other taxable sources.
2. Subtract deductions and credits
- Deduct business expenses such as home office costs, mileage, internet bills, and health insurance.
- Claim any applicable tax credits (e.g., earned income tax credit, child tax credit).
3. Compute your tax liability
- Apply the appropriate federal income tax rate based on your tax bracket.
- Add self-employment tax (15.3%), which covers Social Security and Medicare contributions.
4. Divide by four
- Split the total tax amount into four equal payments and pay them on IRS due dates.
Pro tip: Invoice Fly’s expense tracking tools can help you organize deductions and avoid overpaying on estimated taxes.
Consider paying with your refund
If you expect a tax refund, the IRS allows you to apply part or all of it toward next year’s estimated tax payments. This can help reduce the amount you need to pay out-of-pocket each quarter and ensure you stay compliant with IRS requirements.
How does it work?
- When filing your tax return, you can elect to have your refund applied to next year’s estimated taxes instead of receiving a check or direct deposit.
- The IRS will automatically allocate the refund amount to your first quarterly payment (April 15) and apply any remaining amount to future payments.
- This can be helpful if you struggle with cash flow or don’t want to manually make quarterly payments.
Pros
- Reduces immediate tax burden: Less money needed upfront for estimated tax payments.
- Minimizes the risk of penalties: Ensures you don’t forget or miss a quarterly deadline.
- No additional effort required: The IRS applies the refund directly, so you don’t have to make separate payments.
Cons
- Locks up your money: You won’t have access to your refund for other financial needs.
- Requires overpaying your taxes: If you don’t owe much, this strategy may unnecessarily tie up your funds.
- May not cover full estimated payments: If your refund is smaller than your estimated tax liability, you’ll still need to make additional payments.
Pro tip: If you expect to owe taxes in future quarters but also want flexibility in how you manage cash flow, you may consider splitting your refund — applying part toward estimated taxes and receiving the rest as a payout.
What if I don't pay?
Failing to make quarterly estimated tax payments can lead to penalties and interest charges.
The IRS expects self-employed individuals and other non-W-2 earners to pay taxes throughout the year, not just at the annual filing deadline.
How penalties are calculated:
- The IRS charges interest on underpaid taxes starting from the due date of each quarterly payment.
- Even if you pay your full tax bill by April 15, you can still face penalties if you didn’t make sufficient payments during the year.
- The penalty is calculated based on how much you underpaid and how long the amount remained unpaid.
Potential consequences of missing payments:
- Underpayment penalties: If you underpay estimated taxes, the IRS may charge you a failure to pay proper estimated tax penalty, which accrues interest until the amount is settled.
- Late payment interest: The IRS applies compounding daily interest to unpaid tax balances, increasing what you owe over time.
- IRS notices and audits: Consistently missing payments may lead to IRS scrutiny, requiring you to justify underpayments or provide additional documentation.
Possible lien on assets: In extreme cases, unpaid tax debts may lead to federal tax liens or wage garnishments.
How to avoid penalties:
- Use the safe harbor method: Paying at least 100% of your previous year’s tax liability (110% if earning over $150,000) ensures you avoid penalties.
- Make catch-up payments: If you realize you underpaid in previous quarters, making a larger payment in the next quarter can help offset penalties.
- Adjust W-2 withholdings: If you have a side business but also work a W-2 job, you can increase tax withholding on your paycheck to reduce or eliminate estimated tax obligations.
- Stay organized: Tools like Invoice Fly’s invoice maker and payment tracking software can help you monitor income and calculate payments accurately.
Pro tip: If you accidentally miss a quarterly payment, making a payment as soon as possible can reduce or eliminate penalties. The IRS only charges interest for the time a payment was outstanding, so paying sooner can limit financial damage.
Should I pay in equal amounts?
Most taxpayers pay equal quarterly payments, but if your income fluctuates, the Annualized Income Installment Method may be a better option.
Advantages:
- Aligns your tax payments with actual earnings rather than a fixed amount.
- Helps reduce penalties if your income varies throughout the year.
Pro tip: This method works well for seasonal workers, freelancers, and contract-based employees who experience uneven cash flow.
Saving on penalties
Common tax penalties
The IRS imposes several penalties for missing payments, underpaying, or failing to file taxes:
- Failure to file: 5% per month on unpaid taxes, up to 25%.
- Failure to pay: 0.5% per month on unpaid taxes.
- Failure to pay estimated tax: Penalty varies based on underpayment amount and duration.
- Dishonored check penalty: Fee charged if your tax payment is returned due to insufficient funds.
Pro Tip: Automating payments with Invoice Fly’s online payment system can prevent late payments and avoid penalties.
How to get tax penalties removed
The IRS may waive penalties if you:
- Can prove reasonable cause (serious illness, natural disaster, etc.).
- Have no prior tax penalties (first-time penalty relief).
- Paid most of your tax liability but made an honest mistake.
Pro tip: If you think you qualify for penalty relief, contact the IRS immediately and request abatement.
Stay ahead of tax deadlines and keep more of your earnings
Staying compliant with quarterly estimated tax payments is crucial for freelancers, small business owners, and self-employed professionals.
By accurately calculating payments, tracking deductions, and using the right financial tools, you can stay on top of your tax obligations and avoid costly penalties.
Next Steps:
- Use Invoice Fly’s invoice maker and reporting software to track income and expenses efficiently.
- Set reminders for quarterly tax deadlines to avoid missing payments.
- Apply your tax refund to next year’s estimated taxes if possible.
Start managing your business finances today with Invoice Fly.
How To Calculate Quarterly Estimated Taxes FAQs
Failing to pay can result in a failure to pay penalty, with penalty and interest added based on the amount you owe.
Even if you file your return on time, underpayment penalties still apply.
If you don’t pay at all, additional fees may apply, and the IRS may take action, such as placing a lien on your assets.
Yes, the IRS accepts credit cards, debit cards, and check account payments. However, additional fees may apply for card transactions.
To avoid penalties, consider electronic payment options like EFTPS, which allow scheduled payments to prevent a failure to pay penalty.
Yes, but the IRS may first apply your refund to the amount of tax you owe.
If the balance is greater than your refund, you’ll need to pay the remaining amount to avoid penalties.
To manage cash flow, you can apply your refund toward future estimated payments.
A failure to file penalty applies if you miss the tax deadline, usually 5% of the amount you owe per month, up to 25%. To avoid this, file your return on time, even if you can’t pay in full. Late payments also accrue penalty and interest (late file fees), increasing the total tax you owe.
No, estimated taxes aren’t a tax deduction, but they reduce the amount you owe when filing your tax return. Some states have different eligibility criteria and underwriting rules, so review IRS service terms and conditions to understand available deductions.
Note: IRS regulations and tax laws change frequently, so always review the service terms and conditions before making tax payments. Terms and conditions apply for various IRS payment plans and penalty relief programs, so it’s wise to check your options before assuming you qualify for penalty waivers.
