What Is Estimated Tax? Taxes From A to Z®

Estimated tax is how you pay income and certain other taxes during the year when enough tax isn’t being withheld from your income. That often includes people who are self-employed, freelancers, business owners, or investors, but it can also include employees whose withholding simply doesn’t cover their tax bill.

Form 1040-ES

The federal income tax system is pay-as-you-go, which means you generally can’t wait until you file your return to pay everything you owe with one big check. Instead, you generally make estimated tax payments using Form 1040-ES. How much you need to pay depends on your expected income, deductions, credits, and withholding for the year. If your income is relatively steady throughout the year, that typically means four equal payments, due April 15, June 15, September 15, and January 15.

Estimated Tax Penalty

If you pay too little during the year, you may owe an underpayment penalty even if you pay your entire tax bill by the April filing deadline. Safe harbor rules can help you avoid that penalty. Generally, you need to have paid at least 90% of the tax due for the current year or 100% of the tax shown on the prior-year return, whichever is smaller. (For certain higher-income taxpayers, that prior-year threshold increases to 110%.)