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As if doing taxes once a year isn't enough, the IRS also requires you to make quarterly estimated tax payments if you expect to owe $1,000 or more in taxes after withholding. Entrepreneurs, investors, self-employed people, freelancers and even cash prize winners are all candidates for making quarterly tax payments, which can turn annual tax day into a quarterly event.
But, do you have to make four quarterly payments to avoid IRS late payment and underpayment penalties? Maybe not. If you know how much you'll owe in estimated taxes, you may be able to make one payment for the whole year. Here's how quarterly estimated taxes work and how to decide whether consolidating to a single payment is right for you.
What Are Estimated Taxes?
Estimated taxes are additional tax payments you make for income that isn't subject to withholding (as your paychecks are). In addition to income tax, estimated tax payments may be used to pay self-employment tax or alternative minimum tax. Here are a few examples of taxable income that might require you to make quarterly estimated tax payments:
- Income from self-employment, freelancing or gig work
- Capital gains from investments
- Dividends and interest
- Gains from the sale of your home or other real estate
- Profits from selling or reselling items
- Alimony (taxable spousal support)
Do you need to make estimated tax payments? According to the IRS, you should consider making estimated tax payments if you expect to owe $1,000 or more in additional tax after subtracting your withholding and tax credits from your wages and other taxable income.
You may not need to pay estimated tax if you meet all three of these conditions:
- You did not have tax liability last year.
- You were a U.S. citizen or resident alien for the whole year.
- Your prior tax year covered a 12-month period.
When Are Estimated Taxes Due?
Estimated tax payments are due four times a year, in April, June, September and January. Each payment corresponds to income you earned in the months prior, so your first payment in April is for income you made between January and March; your second payment is for income from April and May; and so on.
This table shows when quarterly estimated taxes are due to the IRS.
| Estimated Tax Due Dates | |
|---|---|
| Income Period | Due Date |
| January 1 to March 31 | April 15 |
| April 1 to May 31 | June 15 |
| June 1 to August 31 | September 15 |
| September 1 to December 31 | January 15 of the following year |
Source: IRS
If the estimated tax due date falls on a weekend or holiday, the due date may be delayed until the next regular business day. Special rules apply to fiscal year taxpayers, and to fishermen and farmers: See IRS Publication 505 for more information if you fall into one of these categories.
Can I Make One Estimated Tax Payment?
You can pay your estimated taxes for the year in a single payment without penalty as long as all of your payments are received on or before their due dates. In some cases, this means prepaying the full year's worth of estimates in place of your first estimated tax payment in April.
Example: If you expect to owe $5,000 per quarter in estimated taxes, you can pay $20,000 in April and skip your June, September and January payments. Technically, you've made all four payments in a timely (in fact, super timely) manner, so you don't owe penalties or interest.
Late Payments
Suppose you decide instead to make a single estimated tax payment at the end of the cycle, in January. In this case, your payments for April, June and September may technically be late. Unless you can prove you received all of your income late in the year, between September and December, a portion of your single end-of-year payment may be subject to penalties.
Single Payments
In a slightly different scenario, you may only need to make one estimated tax payment if you only received income in a single quarter. Say you had a one-time gain or did seasonal work doing deliveries during the holidays. You might only owe estimated taxes for the quarter when you made money. As long as you pay the entire amount you expect to owe by that quarter's due date, you don't need to make payments in other quarters when you made nothing.
Underpayments
Although estimated tax payments aren't meant to be accurate to the penny, your total estimates should be a close approximation of what you actually owe. The IRS allows you to avoid a penalty if you're within $1,000 or 10% of the tax you owe for the year, or if you paid 100% of your prior year's tax in withholdings and estimates.
Waived Penalties
Your penalties may also be waived if an underpayment was the result of a casualty, natural disaster or other unusual circumstance, or if you retired (after reaching age 62) or became disabled during the year.
Possible Drawbacks of One-Time Estimated Tax Payments
Making a single estimated tax payment instead of four might cut down on your workload, but this strategy isn't foolproof. Here are a few pitfalls to keep in mind:
- You might overpay. If you pay more estimated tax than you owe, you may have to wait until tax time to receive a refund.
- You might underpay. If you make more money than anticipated, you could end up owing. To be safe, you may want to track your income and make an additional payment (or payments) if your income goes up or you receive an unexpected mid-year gain.
- You'll need money upfront. Prepaying your estimated taxes for the year means paying out money you haven't earned yet. If cash flow is an issue, you may want to spread your tax payments out over multiple quarters.
How to Pay Estimated Taxes
To calculate and pay your estimated taxes, you may need to do a fair amount of data gathering and math. Basically, though, you'll follow these core steps.
1. Decide When to Pay
Here are three basic approaches to consider:
- Make four regular installment payments if you earn income throughout the year and your income is fairly predictable.
- Make a single installment payment at the beginning of the year to prepay all four installments at once.
- Calculate each installment quarterly if your income varies throughout the year, or if you've received income unexpectedly mid-year.
2. Calculate Your Estimates
Use tax preparation software to help you calculate your estimates or use the worksheet on IRS Form 1040-ES. You may want to gather up your most recent tax return, recent pay stubs, a current-year profit and loss statement, and statements from your bank and investment accounts to help you estimate your income and tax liability.
If you expect your income to be similar to last year's, you can use your most recent tax return to gauge how much you'll need to pay in estimated taxes this year. Again, you can typically avoid penalties if you paid at least 100% of your prior year's tax in withholding and estimates.
3. Make Your Payments
Pay the IRS using any of the following methods:
- Visit the IRS payment site to pay using a debit card, credit card or digital wallet.
- Use Direct Pay to make an electronic payment from your bank account.
- Make a payment via the Electronic Federal Tax Payment System.
- Mail a check or money order to the IRS address shown on Form 1040-ES.
However you pay, save your payment confirmations or canceled checks and don't forget to note your payments on your federal tax return.
The Bottom Line
If you've never paid estimated taxes before, you may have questions: What income is taxable? How is it taxed? If you're self-employed, you may need accounting or bookkeeping help to determine your income and expenses. If you're an investor, you may need help understanding your statements.
Although tax preparation software can help, you might also consider working with a tax advisor, who can help you total up your taxable income, withholding and tax credits—and calculate how much you should pay in estimated taxes. They may even have a recommendation on whether to make quarterly payments or pay all at once, though ultimately that decision is yours.