The United States runs a pay-as-you-go tax system. Employees satisfy it through withholding on every paycheque without thinking about it. Everyone else satisfies it by making estimated payments four times a year, and the penalty for not doing so accrues quietly until the return is filed.
Who needs to pay
Broadly, you need to make estimated payments if you expect to owe at least $1,000 when you file, after subtracting withholding and refundable credits. That catches freelancers and contractors, landlords, people with significant investment income, retirees taking distributions without withholding, and anyone with a large one-off gain.
It also catches a household that is entirely W-2 but badly under-withheld, though that group usually has an easier fix: change the W-4 instead. Our withholding checkup shows the per-paycheque adjustment.
The quarters are not quarters
| Payment | Income period covered | Statutory due date |
|---|---|---|
| First | January 1 to March 31 | April 15 |
| Second | April 1 to May 31 | June 15 |
| Third | June 1 to August 31 | September 15 |
| Fourth | September 1 to December 31 | January 15 of the following year |
The second period is two months long and the fourth is four. This is not a mistake anyone can fix, so diarise the dates rather than counting three months from the last one. When a due date falls on a weekend or a legal holiday, the payment is timely on the next business day. Current details are on the IRS estimated taxes page.
The safe harbours
The prior-year safe harbour is the practical one, because it is a known number. Take last year's total tax from the return, multiply by the applicable percentage, subtract expected withholding, divide by four, and pay that. If this year turns out much better, you will owe the difference in April, but no penalty. If it turns out worse, you can recalculate downward mid-year.
The penalty is really interest
The underpayment penalty is calculated quarter by quarter at a rate the IRS sets each quarter, tied to the federal short-term rate. It is charged on the shortfall from the day it was due until the day it is paid. Two consequences follow. Paying late is better than not paying, because the clock stops when the money arrives. And a large fourth-quarter payment does not retroactively repair a missed first quarter.
The withholding shortcut
Withholding is treated as paid evenly throughout the year no matter when it actually happened. That gives a household with any W-2 income a powerful late-year repair: increase withholding in November and December, and the extra counts as if it had been paid in equal parts since January. A retiree can do the same with withholding on an IRA distribution. This trick fixes a year that got away from you in a way that a December estimated payment cannot.
Uneven income
If your income arrives in lumps, paying a quarter of the annual figure every quarter can mean paying tax on money you have not earned yet. The annualised income instalment method lets you pay based on what you actually earned in each period, computed on Form 2210 Schedule AI. It is more work and it is the right answer for seasonal businesses, consultants with a single large project, and anyone who sold an asset in October.
How to pay
- IRS Direct Pay for a free transfer from a bank account, with no registration.
- EFTPS, the Treasury system, which requires enrolment and keeps a payment history. Useful for businesses.
- Card, through an approved processor, which charges a percentage fee.
- Cheque with Form 1040-ES, which still works and still gets lost occasionally.
Whatever you use, record the date, the amount and the tax year you applied it to. Payments applied to the wrong year are one of the more tedious problems to unpick, and your preparer will ask for the list in January.
Do not forget the state
Most states with an income tax want their own estimated payments on a similar schedule, and their safe harbours are not always identical to the federal ones. Start with your state revenue department, which you can reach through the official state tax agency list.
A workable routine
Open a second savings account. Every time a client payment lands, move a fixed percentage of it across immediately, before it feels like income. On the four dates, pay from that account. Run the numbers once mid-year with the self-employment calculator and adjust the percentage. That is the entire system, and it removes the single most common cause of a spring crisis.