Quarterly Estimated Taxes: A Plain-English Guide for the Self-Employed

Why estimated taxes exist

When you work for an employer, tax is withheld from every paycheck and sent to the IRS on your behalf. When you work for yourself, nobody does that for you. The US tax system is pay-as-you-go, so the IRS expects you to send in tax throughout the year rather than in one lump sum the following April.

Estimated taxes are simply those in-year payments. They cover both federal income tax and self-employment tax, which is how freelancers and sole proprietors pay into Social Security and Medicare.

Who needs to pay

As a rule of thumb, you should make estimated payments if you expect to owe at least $1,000 in federal tax for the year after subtracting any withholding and refundable credits. That includes freelancers, independent contractors, gig workers, small business owners filing on Schedule C, and people with significant investment or rental income.

If you have a day job and a side business, you can often skip quarterly payments by increasing the withholding on your W-4 instead. Withholding is treated as if it were paid evenly through the year, which can be a convenient fix if you start a side hustle late in the year.

How to estimate what you owe

Start with your expected net self-employment income: revenue minus deductible business expenses. Self-employment tax is 15.3% on 92.35% of that amount, up to the Social Security wage base, with the 2.9% Medicare portion continuing above it. You can deduct half of your self-employment tax when computing income tax.

Next, estimate your income tax using the current-year brackets, your filing status and your deductions, including the qualified business income deduction if you're eligible. Add the two together, subtract any withholding, and divide the result by four.

Many freelancers find it simpler to set aside a fixed percentage of every payment they receive — often 25% to 30% — into a separate savings account, then pay each quarter from that pot. It's less precise, but it builds the habit and prevents a nasty surprise.

The four deadlines

Federal estimated payments are typically due on April 15, June 15, September 15 and January 15 of the following year. When a date falls on a weekend or holiday, it moves to the next business day. Note that the periods are not equal quarters: the second payment covers only two months of income.

You can pay through IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), your IRS online account, or by mailing a voucher from Form 1040-ES. Most states with an income tax have their own estimated payment schedule, so check your state revenue department as well.

Avoiding underpayment penalties

The IRS charges an underpayment penalty, calculated like interest, when you pay too little or too late. You're generally protected by a safe harbor if you pay at least 90% of this year's tax or 100% of last year's tax, whichever is smaller. If your adjusted gross income last year was above $150,000 ($75,000 if married filing separately), the prior-year threshold rises to 110%.

The prior-year safe harbor is the most predictable option when your income is growing, because you know the number in advance. If your income dropped sharply, basing payments on the current year may let you pay less. Either way, keep records of every payment and its date.