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Quarterly Tax Estimates: What They Are & Who Pays Them
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Quarterly tax estimates are tax payments made on a quarterly basis throughout the fiscal year. Self-employed individuals and business owners often pay these estimates, but they are generally required of any individual or entity that is expected to owe $1,000 or more when they file their tax return at the end of the year.
Quarterly tax estimates are often owed when someone earns a substantial amount of self-employment, interest, dividends, rent, or alimony income each year, as these types of income are not generally subject to federal withholding. In these cases, quarterly tax estimates serve a similar function to regular withholding and are designed to help taxpayers owing a large lump sum at the end of the year.
What Are Quarterly Tax Estimates
Quarterly tax estimates are payments made to the IRS and state tax agencies four times a year. If you expect to owe more than $1,000 when you file your tax return, you spread out the payments over four quarters instead of paying your entire tax bill in one lump sum at the end of the tax year. This serves as a kind of pay-as-you-go system designed to cover income not subject to withholding, such as self-employment income, investment returns, or rental income.
Quarterly estimates are required to be paid by individuals and entities that expect to owe more than $1,000 in federal income tax because the U.S. operates under a pay-as-you-go tax system. The
IRS requires taxpayers to pay their taxes owed over the course of the year. If you do not have enough tax withheld or do not make the required estimated tax payments, you may have to pay a penalty.
For self-employed individuals and business owners, quarterly tax estimates can be an efficient way to manage tax obligations, avoid hefty year-end tax bills, and prevent potential penalties for underpayment.
If you’ve just recently started your business or moved to self-employment, you may not have had to pay quarterly tax estimates previously. One of the easiest ways to get set up is to start using a bookkeeping system like
QuickBooks. We’ve partnered with QuickBooks to help our readers get started with a 30% discount for the first six months. Click below to learn more and to get started.
Who Pays Quarterly Tax Estimates
The goal of paying quarterly tax estimates is to cover the tax liability on income not subject to withholding, thereby avoiding a sizeable year-end tax bill and potential penalties. Any person or entity that expects to owe $1,000 or more when they file their federal return for income not subject to withholding must pay quarterly estimates. This typically includes:
- Self-employed individuals: Freelancers and independent contractors whose wages aren’t subject to withholding must estimate and pay their taxes quarterly.
- Business owners: Owners of small and large businesses alike are required to make quarterly tax estimate payments.
- Recipients of interest, dividends, and rent: If this income is significant, these individuals may need to make estimated tax payments.
- Recipients of alimony: Alimony payments are also taxable and may require the recipient to make quarterly tax estimates.
- Prize or award winners: If the value of prizes or awards is large enough, it may necessitate these tax payments.
- Employees with additional income: Full-time employees who have extra income not subject to withholding, such as from a side business or gig work, may need to make these payments.
Quarterly Tax Estimate Due Dates
Quarterly tax estimates are due on specific dates throughout the year. For the year 2023, the due dates set by the Internal Revenue Service (IRS) are as follows:
- 1st Quarter: April 15, 2023
- 2nd Quarter: June 15, 2023
- 3rd Quarter: September 15, 2023
- 4th Quarter: January 15, 2024
If the due date falls on a weekend or holiday, the deadline is usually extended to the next business day, but you should confirm this directly with the IRS or a licensed accountant. It is crucial to adhere to these dates to avoid penalties and late fees.
In addition to federal requirements, most states that levy state income tax also require quarterly estimate payments by entities and individuals that expect to have a certain amount of tax liability at the end of the year. Requirements vary by state and taxpayer type – individual, LLC, corporation, or other – so it’s essential to consult your state requirements or a tax advisor licensed in your state to ensure you meet local requirements.
How Quarterly Tax Estimates are Calculated
Quarterly tax estimates are calculated based on your projected income and deductions for the year. It’s essentially done by forecasting income based on prior rears. Tax liability is then calculated using those projections, and the resulting tax liability is divided by four to figure the estimated tax payment per quarter.
The IRS provides
Form 1040-ES, which includes a worksheet to help in the calculation process. This worksheet considers your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. If you need additional help, you can work with a licensed tax professional to calculate your estimated payments.
However, calculating your quarterly tax estimates isn’t supposed to be a one-time event. Ideally, you should revisit your estimates each quarter as your income and deductions change. That way, you can increase or decrease your quarterly estimate payments as your expected income rises or falls.
Tips for Paying Quarterly Tax Estimates
Calculating, budgeting for, and paying quarterly tax estimates can be challenging, especially when doing it for the first time. Here are some helpful tips to get started:
- Understand your tax obligation. Your first step should be to understand what tax you’re likely to owe for the year on income that isn’t subject to withholding. You’ll need to forecast your income and deductions for the year, then divide your estimated tax liability by four. This will give you the amount you need to pay each quarter.
- Set up a sinking fund. A sinking fund is simply an account where you can set aside money for quarterly tax payments. Having this account will help you stay on top of your estimated taxes and avoid delaying or skipping quarterly payments.
- Set reminders. To ensure that you remember to make payments on time, set reminders in your calendar for each due date. This will help you stay organized and avoid penalties for missed payment deadlines.
- Keep accurate records. This includes keeping receipts, invoices, or any other documentation that can help the calculation process.
- Use the IRS Worksheet and online tools. The IRS provides a worksheet as part of Form 1040-ES to aid in the calculation process. There are also online tools and software that can help you calculate your quarterly tax estimates.
- Consider hiring a tax professional. A licensed tax professional can help you understand your tax obligations, accurately calculate your estimates, and prepare your returns at the end of the year to make sure you didn’t over- or under-pay your quarterly estimates.
