How do quarterly estimated taxes work?

If no employer withholds tax from your pay, the IRS expects you to pay during the year in four installments, usually due April 15, June 15, September 15 and January 15. The simplest safe amount is last year's total tax divided by 4, minus any tax already withheld.

Who has to pay

In most cases you must pay estimated tax if you expect to owe at least $1,000 for the year after subtracting withholding and refundable credits. That usually means freelancers, contractors, gig workers, landlords and people with large investment gains.

The four due dates

For a calendar year, payments are due April 15, June 15, September 15 and January 15 of the following year. The periods are uneven: the June payment covers only two months of income, and the January one covers four.

The safe harbor rule

You avoid the underpayment penalty if your withholding plus estimated payments cover the smaller of 90% of this year's tax or 100% of last year's tax. If last year's adjusted gross income was over $150,000 ($75,000 married filing separately), use 110% of last year's tax.

What the payments cover

Estimated payments cover your income tax and your self-employment tax together. Self-employment tax is 15.3% on 92.35% of your net earnings, the Social Security and Medicare tax an employer would normally split with you.

Why the IRS wants tax during the year

US income tax is pay as you go. For an employee, the employer withholds tax from each paycheck and sends it in, so by April most of the tax is already paid. When you work for yourself, no one withholds anything, so the IRS asks you to send it in yourself as you earn.

If you wait until you file, you can owe a penalty for each quarter you underpaid. It is figured like interest on the shortfall, for the number of days it was late, at a rate the IRS sets each quarter. It is not a disaster, but it is money you can keep with a little planning.

How to figure each payment

There are two common ways. The first is the safe harbor method: find the total tax on last year's Form 1040, subtract any tax you expect to have withheld this year, and divide what is left by 4. If your income is steady or rising, this is the easiest way to avoid the penalty, though you may still owe a balance in April.

The second is to estimate this year's tax. Project your net profit (income minus business expenses), figure self-employment tax, then figure income tax on what remains after your deductions. The worksheet in Form 1040-ES walks through it. This method is worth the effort when your income dropped, since 90% of a smaller year can be much less than last year's bill.

In your first year of self-employment you have no prior-year tax from this work, so estimate. Many people set aside 25% to 30% of net profit as a starting point, then check it against the 1040-ES worksheet or a calculator once they know their numbers.

When your income is uneven

If most of your money came in late in the year, equal payments can look too high early on. The annualized income installment method on Form 2210 lets you match each payment to what you actually earned in that period. It takes more paperwork, so use it when your income clearly arrives in lumps.

If you earn a big payment in, say, August, send extra with the September payment. Each due date is judged on its own, so paying more later does not erase an earlier shortfall, but it stops the penalty from growing.

How to pay

You can pay online with IRS Direct Pay from a bank account, through your IRS online account, by debit or credit card through an approved processor (they charge a fee), or by mailing a check with a 1040-ES voucher. Online is fastest and gives you a confirmation number.

When you file your return, list the total of your estimated payments. The IRS credits them against your tax for the year. If you paid too much, you get a refund or can apply the extra to next year's first payment.

If you have a job and a side income

Withholding from a job counts toward the safe harbor too. If your side income is modest, you can often skip estimated payments by asking your employer to withhold more on a new Form W-4. The IRS Tax Withholding Estimator shows how much extra to add.

This works well because withholding is treated as paid evenly through the year, even if you only raise it in October. Estimated payments are credited on the day you make them.