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HPC's Guide to Estimated Tax
A guide to estimated taxes for individuals in the United States.
HPC's Guide to Estimated Tax

1 What is estimated tax?

Estimated tax is the payment of tax throughout the year before filing your individual income tax return. It is "estimated" because you have to guess the amount of tax to pay before you've earned all your income for the year. Estimated taxes are usually paid on a quarterly basis.

2 Who has to pay estimated tax?

The answer to this depends on whether or not your employer withholds income tax from your pay.

2.1 Income subject to withholding

If you work as an employee, your employer most likely withholds income tax from your pay. Your employer also takes out FICA tax, the federal payroll tax that funds Social Security and Medicare. This is called tax withholding and is the reason why the net amount of your paycheck is less than your gross pay or salary. Employees determine the amount of withholding by filling out a Form W-4 when they are hired.

This type of income usually doesn't require estimated tax payments, since the tax is taken out by the employer and sent to the government on your behalf. The withheld tax is usually more than the tax owed, which is why most people end up getting a refund at tax time.

However, you may have to pay estimated tax on this income if your withholding is not set high enough. Make sure to correctly fill out your Form W-4 for your employer to ensure that your withholding is set at the right amount.

2.2 Income not subject to withholding

Some income is not subject to withholding. Estimated tax must be paid on income that is NOT subject to withholding (or if your withholding is not high enough).

There are some types of income from which taxes are not withheld:

  • 1099 income
  • Alimony
  • Contractor payments
  • Dividends
  • Earnings from your business
  • Gains from sales of stocks or other assets
  • Interest income
  • Prizes & awards
  • Rental income
  • Self-employment income

Taxes may or may not be withheld from:

  • Bonuses
  • Commissions
  • Gambling winnings
  • Pensions

3 When to pay estimated tax

If you have income from sources listed above, or if you don't pay enough through withholding, you may have to pay estimated tax. In general, you're required to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return, or if you owed tax with your tax return for the last year.

If you don't pay enough tax through withholding or estimated tax payments, and you owe more than $1,000 you will be charged interest and penalties.

3.1 Quarterly schedule for estimated tax payments

Estimated taxes are due in four quarterly installments throughout the year. If the due date for an estimated tax payment falls on Saturday, Sunday, or legal holiday, the payment will be on time if you pay the next business day.

If a payment is mailed, the date of the U.S. postmark is considered as the date of payment.  

3.2 Estimated tax payment due dates for calendar year taxpayers

  • April 15
  • June 15
  • September 15
  • January 15 (the following year)

Note that you can delay making the January 15 payment if you file the previous year's tax return by February 2 and pay the entire balance (including last quarter's estimated taxes) with your return.

4 Penalties for underpayment of estimated tax

If you don't pay enough through withholding or estimated tax payments throughout the year, you may be charged a penalty by the IRS. To avoid a penalty, you must either owe less than $1,000 in taxes for the year or have paid at least 90% of your actual tax liability in advance.

The penalty takes the form of interest. Interest is charged on the underpayment (the difference between what should have been paid for each quarter and what was actually paid). The interest is charged for as long as the underpayment remains outstanding.

4.1 The "safe harbor" rule

If you paid tax last year, there is a safe harbor rule that allows you to avoid penalties by paying the same amount this year, split into four payments. If you do this, you won't be charged penalties even if you end up making more money and owing more tax this year. (If your income exceeds $150,000 for the year, then you have to pay 110% of the tax owed last year for the safe harbor rule to apply. There are also special rules for farmers and fishermen, so be sure to check the IRS Publication 505, Tax Withholding and Estimated Tax, for more details.)

The safe harbor rule is great for avoiding penalties, and makes it simple to calculate your estimated tax payments. However, if your income changes substantially, you could end up paying too much or too little estimated tax. Paying too little estimated tax could result in a painful bill on April 15. And if you pay too much tax, the government won't pay you any interest for holding on to your money.

4.2 Interest rates on underpayments

The IRS sets the interest rate each year. Here is a handy chart of IRS underpayment interest rates going back to 1983.

5 Penalties for late payment of estimated tax

You can also incur a penalty if you don't pay enough estimated tax by each due date, even if you are due a refund when filing your tax return. So it's important to pay every quarter and on time.

6 How do I pay estimated taxes?

Here are your options for paying estimated taxes:

6.1 Pay by check

To pay by check, fill out the IRS Form 1040-ES vouchers and mail along with your payment. (The vouchers start on page 9.) If you mail your payment and it is postmarked by the due date, the date of the U.S. postmark is considered the date of payment. For your protection, if you are going to mail your estimated tax payments, it is best to mail these certified mail.

6.2 Pay online

Alternatively, you can make your federal estimated tax payment electronically with a credit card or by ACH bank transfer (electronic check).

6.2.1 ACH bank transfer

For making a payment by ACH, the IRS gives you the option of Direct Pay or the Electronic Federal Tax Payment System (EFTPS). Direct Pay is more convenient as it doesn't require a registration process. However, you will have to verify your identity each time you want to make a payment. You also must have previously filed a tax return to use the system.

EFTPS has more features, but requires a registration process that can take 1-2 weeks. After beginning the registration process online, you'll receive a PIN in the mail that you'll use to complete your enrollment.

6.2.2 Credit or debit card

To make a credit card payment, you can use one of the third-party payment processors listed on the IRS website. Each of the third-party processors charges a convenience fee that is around $3  to $5. The fee for credit card payments ranges from 1.87% to 2.35%.