Tax Tip Tuesday: Understanding Estimated Tax Payments

Why Estimated Taxes Exist

The U.S. tax system is pay-as-you-go, which means taxpayers are expected to pay taxes as income is earned, not just at the end of the year. When you’re a W-2 employee, this happens automatically—federal and state taxes are withheld from each paycheck by your employer. But if you're self-employed or have income from sources like rental property, dividends, or a small business, there may be no withholding. In that case, the responsibility to pay tax throughout the year falls on you, through estimated tax payments.

Who Needs to Make Estimated Payments?

You generally need to make estimated tax payments if you expect to owe $1,000 or more when you file your tax return. The IRS also considers whether your withholding and refundable credits will cover at least 90% of your current year’s total tax or 100% of your prior year’s tax liability. If your adjusted gross income (AGI) was over $150,000 ($75,000 if married filing separately), you’ll need to cover 110% of the prior year’s tax to meet the safe harbor threshold and avoid penalties.

What Income Requires Estimated Payments?

Estimated tax payments are typically required for income that isn't subject to withholding. This includes self-employment income, interest, dividends, capital gains, rental income, alimony from pre-2019 divorce agreements, and income passed through to you from partnerships or S corporations. If you're earning income that doesn’t have taxes automatically withheld, you’re likely on the hook for quarterly estimates.

When Are Estimated Payments Due?

Estimated taxes are paid in four installments, each corresponding to a portion of the year’s income. For tax year 2025, the payment schedule is as follows:

• April 15, 2025 (for income earned January 1 – March 31)

• June 16, 2025 (for income earned April 1 – May 31)

• September 15, 2025 (for income earned June 1 – August 31)

• January 15, 2026 (for income earned September 1 – December 31)

  
  

If the due date falls on a weekend or federal holiday, it shifts to the next business day.

How Do You Calculate Your Estimated Payments?

There are two primary methods to calculate your estimated tax liability. The first is the prior-year safe harbor method. This means paying 100% of your previous year’s tax liability (or 110% if your AGI exceeded $150,000), spread across the four quarterly due dates. This method is simple and guarantees penalty protection if paid timely and evenly.

The second option is to estimate your current year’s income and calculate the tax due using the IRS’s worksheets. This method can be more accurate if your income fluctuates significantly from year to year, but it requires careful tracking and possible adjustments throughout the year. The IRS Withholding Estimator and the Form 1040-ES worksheet can help with this.

How Do You Make a Payment?

Estimated payments can be made in several ways. You can use IRS Direct Pay online, log into your IRS online account, or schedule payments through the Electronic Federal Tax Payment System (EFTPS). If you prefer mailing a check, you can do so using the Form 1040-ES payment voucher. Most states also have separate portals and forms for making state estimated payments, so be sure to check your state’s requirements.

What If You Miss a Payment?

Missing an estimated tax payment or underpaying can result in penalties and interest, even if you pay the full balance by April 15. The IRS uses Form 2210 to calculate these penalties. In some cases, you can request a waiver if the underpayment was due to a reasonable cause (such as a natural disaster or unexpected life event), but it’s generally best to pay accurately and on time to avoid complications.

Estimated tax payments help you avoid surprises during tax season and reduce the risk of penalties. Just like withholding helps spread out an employee’s tax liability throughout the year, estimated payments help independent earners and investors stay current. If your income varies during the year, reevaluate your payments mid-year and adjust accordingly. Staying proactive with your estimated taxes is one of the smartest ways to stay compliant—and stress-free.

Need help estimating your quarterly tax payments? MKHS Tax Group can help you calculate and stay on top of your obligations. Contact info@mkhstaxgroup.com