Taxes can be a complex and stressful aspect of financial planning, especially if your income isn’t subject to traditional payroll withholding. For individuals who earn income outside of a regular paycheck — such as business owners, freelancers, investors, or retirees — quarterly tax payments may be necessary to stay on track with your obligations and avoid penalties.

But how do you know if you need to make these payments, and how do you go about it?

What Are Quarterly Estimated Tax Payments?

Quarterly estimated tax payments are payments made four times a year to cover your federal income tax liability. These payments are typically required if you earn income that isn’t subject to tax withholding, such as:

  • Income from self-employment, freelancing, or consulting.
  • Rental income or investment earnings.
  • Dividends, capital gains, or other non-traditional sources of income.
  • Certain retirement income.

The Internal Revenue Service (IRS) requires these payments to ensure that taxes are paid throughout the year, rather than all at once when you file your return.

Who Needs to Make These Payments?

The IRS requires quarterly estimated tax payments from individuals who expect to owe at least $1,000 in taxes after accounting for withholding and refundable credits. This often includes:

  • Self-Employed Individuals: Freelancers, consultants, and business owners who don’t have taxes withheld automatically.
  • High-Income Earners with Investment Income: Those with significant income from dividends, interest, or capital gains.
  • Individuals with Multiple Income Streams: People with side businesses or rental income, especially if their primary job doesn’t withhold enough tax.
  • Retirees with Taxable Withdrawals: Retirees drawing taxable income from retirement accounts without withholding.

If you fit into one of these categories, you may need to pay your estimated taxes to avoid penalties.

How Do You Make Quarterly Payments?

Making quarterly estimated tax payments involves several steps. For accurate calculations — and peace of mind — consider working with a tax professional. They can guide you through the process, ensure compliance with IRS rules, and help you avoid costly penalties.

  1. Estimate Your Tax Liability

Start by calculating your estimated total tax liability for the year. This begins with determining your adjusted gross income (AGI), which represents your total minus any applicable deductions. From there, apply the appropriate income tax rate based on your filing status and taxable income to calculate your estimated tax liability. Be sure to consider any additional taxes, such as self-employment tax, to get a more accurate figure. IRS Form 1040 – ES provides worksheets to help with this calculation.

  1. Divide Payments Equally

Once you have a solid estimate of your total tax liability, divide the amount into four equal payments. These payments are due quarterly to cover your obligation for the entire year. For example, if you estimate your annual tax liability to be $100,000, you would typically make four payments of $25,000. Keep in mind that if your income fluctuates, you may need to adjust payments using the annualized income installment method.

  1. Submit Payments

Payments can be made online through IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS) for a quick, secure process. Alternatively, you can mail a check with the payment voucher from Form 1040-ES.

  1. Adjust as Needed

If your income varies throughout the year, you can adjust future payments accordingly. For instance, if you earn less than expected in one quarter, reduce your next payment. If income increases, raise your payment to avoid underpayment penalties. Tools like the annualized income installment method worksheet can help simplify these calculations.

When Are Quarterly Payments Due?

The IRS expects quarterly payments by the following dates each year:

  • April 15 (for income earned January-March)
  • June 15 (for income earned April-May)
  • September 15 (for income earned June-August)
  • January 15 of the following year (for income earned September-December)

If the due date falls on a weekend or holiday, the deadline is extended to the next business day.

What Happens If You Don’t Make Payments?

Failing to make quarterly estimated payments can lead to several consequences:

  • Penalties: The IRS imposes penalties for underpayment of taxes, calculated based on the amount underpaid and the length of time it was unpaid.
  • A Large Tax Bill: If you don’t pay throughout the year, you may face a hefty tax bill when filing your return.
  • Interest Charges: The IRS may also add interest to unpaid amounts.

However, some expectations apply. You might avoid penalties if you paid at least 90% of your tax liability during the current year or 100% of last year’s tax liability (110% of last year’s tax liability if your AGI is over $150k). You may also avoid penalties if your income fluctuated significantly and you used the annualized income installment method to make correct payments.

Let Us Help You Stay on Track

Managing your taxes is a critical part of a well-rounded financial plan. At Ironwood Wealth Management, we specialize in tax strategies to help you minimize your liability and avoid costly penalties. Whether you’re self-employed, an investor, or managing multiple income streams, our teams can guide you through the process and keep your financial goals on track.

Contact us today for personalized assistance with quarterly payments and other financial planning needs. Together, we’ll ensure your tax strategy supports your long-term success.