Estimated Tax
Quarterly tax payments made by self-employed individuals, investors, and others whose income is not subject to sufficient withholding.
Detailed Explanation
Estimated tax is paid using Form 1040-ES in four installments due April 15, June 15, September 15, and January 15 of the following year. To avoid an underpayment penalty, taxpayers generally must pay at least 90% of the current year's tax or 100% of the prior year's tax (110% if prior-year AGI exceeded $150,000). Quarterly payments cover federal income tax, self-employment tax, and the 3.8% Net Investment Income Tax where applicable.
Key Points
- Four installments due roughly April 15, June 15, September 15, and January 15 of the next year.
- Safe harbor: pay the lesser of 90% of current-year tax or 100% of prior-year tax (110% if prior-year AGI exceeded $150,000).
- The underpayment penalty (IRC §6654) is calculated quarterly, so paying late in the year does not fully fix an early shortfall.
- W-2 withholding is treated as paid evenly across the year, which makes increasing withholding a useful catch-up tool.
- Covers federal income tax, self-employment tax, and the 3.8% NIIT where applicable.
Practical Example
A freelancer expects $120,000 of net self-employment income and roughly $34,000 of combined income and SE tax for the year. To meet the 90% safe harbor she pays about $7,650 per quarter via Form 1040-ES. If her prior-year tax was only $20,000 and her prior-year AGI was under $150,000, she could instead pay $5,000 per quarter (100% of prior-year tax) and avoid the penalty even if she owes more at filing.
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