Don’t Let Quarterly Estimated Tax Payment Obligations Catch You Off Guard

If you're self-employed, run your own small business, or have rental or investment income, there's a good chance you must make quarterly estimated tax payments. These payments include income tax and, if applicable, self-employment tax. Failing to make them — or miscalculating how much you owe — can result in penalties and interest.

Who Needs to Pay Quarterly Estimated Taxes?

Anyone who receives income that isn't subject to withholding may be required to make estimated tax payments. This typically includes:

• Independent contractors, such as freelancers, consultants and gig workers,
• Sole proprietors and small business owners,
• Partners in a partnership,
• S corporation shareholders,
• Landlords with rental income, and
• Investors with capital gains or dividend income.

Generally, you must make estimated payments if you expect to owe at least $1,000 in federal tax for the year after subtracting any withholding and refundable credits. This includes income tax and, to the extent applicable, self-employment tax (Social Security and Medicare).

When Are Quarterly Tax Payments Due?

The IRS divides the year into the following four payment periods, but the deadlines don't align exactly with calendar quarters:

Estimated Tax Payment Schedule

If a due date falls on a weekend or holiday, it's extended to the next business day. For example, June 15, 2025, falls on a Sunday, so the deadline is Monday, June 16, 2025.

How Are Estimated Taxes Calculated?

Calculating estimated taxes requires projecting total income, deductions, credits and withholding for the year. Specifically, here are six steps for the calculation:

1. Estimate total annual income from all sources.
2. Subtract deductions, such as above-the-line deductions (e.g., retirement plan contributions, self-employment deductions), the standard deduction or projected itemized deductions, and eligible business expenses.
3. Apply the appropriate federal income tax rate to determine your income tax.
4. Add self-employment tax, if applicable, which is 15.3% on net earnings from self-employment up to $176,100 for 2025 and 2.9% on net self-employment earnings over that amount.
5. Subtract any expected tax credits and withholding.
6. Divide the total by four to determine each quarterly payment.

Some quarters cover more months than others. For example, the June deadline covers just two months, while the January deadline covers four. Even so, the IRS generally expects equal payments throughout the year.

However, if your income is seasonal or fluctuates significantly, you may qualify for the annualized income installment method. Under this method, your payment amounts are adjusted based on when income was actually earned. This approach can help prevent penalties, but it's more complex.

As you can see, properly estimating your income and deductible expenses and determining whether to use the annualized installment method is no small undertaking. Your tax advisor can help you with income and expense projections and the proper tax calculations.

What Happens If You Don't Pay Enough?

Underpaying your estimated taxes can result in IRS penalties — even if you end up getting a refund when you file your return. Penalties are based on the underpayment amount, the length of the delay and the current IRS interest rate.

Common situations that trigger penalties are:

• Missing a payment,
• Paying after the due date, and
• Underestimating income and paying too little.

Safe harbor rules can help you avoid penalties. You're generally in the clear if, through estimated taxes and withholding, you pay at least:

• 90% of your current year's tax liability, or
• 100% of your previous year's tax liability (110% if your adjusted gross income was over $150,000, or, if married filing separately, over $75,000).

If you have any income from which taxes are withheld, increasing your withholding might help you avoid penalties — and provide other benefits. See "An Alternative: Increase Withholding If You Also Have W-2 Income" below.

Tips for Staying on Top of Quarterly Tax Payments

Managing quarterly tax payments doesn't have to be daunting. With some organization and a few smart habits, you can build a system that minimizes both the risk of penalties and your stress.

First, regularly set aside money for taxes. Consider opening a dedicated savings account to keep funds for taxes separate and automating regular transfers to the account if your income is steady.

How much should you save? A common rule of thumb is 25% to 30% of net income. But, depending on your marginal tax bracket, you may need to set aside more. If you have enough cash on hand, consider putting aside 5% to 10% beyond your estimates to cover unexpected income spikes or tax law changes.

How can you ensure you're accurately estimating your taxes? Accounting tools or apps, such as QuickBooks, Xero and FreshBooks, can automatically track income and calculate estimated taxes. But these tools are only as good as the data you enter into them. If you aren't properly recording all income and expenses, these solutions won't provide accurate tax estimates.

It's also critical to reassess your income and estimates every quarter and adjust your payments accordingly. Otherwise, you could end up underpaying taxes and owing penalties and interest — or overpaying taxes and giving the federal government an interest-free loan.

If keeping track of deadlines isn't your strong suit, you may want to automate your quarterly payments. You can use the Electronic Federal Tax Payment System (EFTPS) or IRS Direct Pay to set up automatic payments. This will ensure you make quarterly payments on time, but you still risk underpaying.

Easing the Compliance Burden

Estimating quarterly taxes may sound straightforward. However, it can be challenging to remember payment deadlines, project income and eligible deductions, and make any adjustments needed due to tax law changes. That's why partnering with a knowledgeable tax professional isn't just helpful — it's smart business. Contact your tax advisor to stay compliant and avoid costly missteps.

An Alternative: Increase Withholding If You Also Have W-2 Income

Do you earn W-2 income as an employee in addition to self-employment, business, rental or investment income? You may be able to increase your paycheck withholding and eliminate the need for quarterly estimated tax payments — or at least reduce your risk of penalties.

You simply submit a revised Form W-4 to your employer with a higher withholding amount. Of course, you'll still need to accurately estimate the additional withholding amount. The IRS Tax Withholding Estimator can be a good starting point, and your tax advisor can help you confirm the correct amount.

Because this strategy offers simplicity, it's especially useful if your non-W-2 income is modest. You can potentially rely solely on withholding to meet your tax obligations — and avoid the hassles of quarterly estimated tax payments.

Increasing withholding instead of making quarterly estimated tax payments probably won't make sense if self-employment, business, rental and/or investment activities are your primary income source(s). But in this situation, increasing withholding might help you avoid penalties if you notice, as year-end approaches, that you've underpaid.

Withholding is considered to have been paid evenly throughout the year, even if, in actuality, the withheld amounts varied. So increasing your withholding to cover an estimated tax payment shortfall can be better than making up the difference with an increased tax payment for a subsequent quarter — which might still leave you exposed to penalties for earlier quarters.