Understanding Estimated Tax Payments: What They Are and Why You Might Owe Them

When most people think about paying taxes, they think of filing a return by April 15 and either getting a refund or writing a check. But for millions of taxpayers—especially business owners, freelancers, investors, and retirees—taxes aren't just a once-a-year event. They’re a year-round responsibility, and that’s where estimated tax payments come in.

What Are Estimated Tax Payments?

Estimated tax payments are periodic payments made throughout the year to cover taxes on income that isn’t subject to automatic withholding. This includes:

• Self-employment income

• Rental income

• Investment earnings (like interest, dividends, and capital gains)

• Retirement income that doesn't withhold enough tax

• Alimony received (for divorces finalized before 2019)

• Income from side gigs or freelancing

  
  

If you earn money and taxes aren’t withheld—or aren’t withheld enough—the IRS expects you to pay taxes as you go. Waiting until the end of the year can lead to underpayment penalties and interest, even if you pay everything you owe by April.

Who Needs to Pay Estimated Taxes?

You generally need to make estimated payments if:

• You expect to owe at least $1,000 in tax after subtracting withholding and credits, and

• Your withholding and credits will be less than the smaller of:

  • 90% of the tax you’ll owe for the current year, or

  • 100% of the tax you owed last year (110% if your adjusted gross income was over $150,000)

    
    

This often applies to:

• Self-employed individuals and small business owners

• High-income earners with investment income

• Retirees with pension or IRA income that doesn’t withhold enough

• Employees with significant side income (like Airbnb, Uber, or Etsy sales)

  
  

How and When Do You Pay?

Estimated tax payments are typically due four times a year, on the following schedule:

• April 15 – for income earned January 1–March 31

• June 15 – for income earned April 1–May 31

• September 15 – for income earned June 1–August 31

• January 15 (of the following year) – for income earned September 1–December 31

  
  

Payments can be made online through the IRS Direct Pay system, by mail with Form 1040-ES, or through EFTPS if you’re a business owner.

⚠️ Important: If you miss a deadline or don’t pay enough, the IRS may assess underpayment penalties and interest—even if you pay the full balance when you file your tax return.

Why Did I Get Hit With a Big Tax Bill?

If you were surprised by a large balance due or a penalty on your tax return, it’s often because you didn’t make enough estimated tax payments throughout the year. Common reasons include:

• Transitioning from a W-2 job to self-employment

• Selling investment property or stocks for a large gain

• Taking large retirement distributions

• Earning unexpected income (bonuses, consulting gigs, etc.)

  
  

How to Avoid Surprises

1. Use IRS Form 1040-ES or work with your tax professional to project your income and tax liability for the year.

2. Increase withholding from other income sources (like a spouse’s paycheck or your Social Security).

3. Set reminders for the quarterly deadlines.

4. Make adjustments throughout the year if your income changes significantly.

   
   

Final Thoughts

Estimated tax payments help you stay ahead of your tax obligations and avoid costly penalties and interest. If you’re earning income outside of a typical job—or your income fluctuates during the year—review your situation regularly. A good tax advisor can help you calculate the right amount to pay and keep you compliant without overpaying.