Estimated Quarterly Tax Payments

Estimated quarterly taxes are an obligation that the IRS imposes on self-employed individuals and those with other forms of non-wage income, such as investment income and gambling winnings. Unlike W-2 salaries and wages, there is no automatic federal tax withholding on these sources of income.

Nevertheless, this does not prevent the IRS from collecting its share of the money. The IRS mandates estimated quarterly payments to ensure it collects your income tax throughout the year. Failure to comply can impact your personal finances and result in a penalty for underpayment.

The deadlines for making quarterly estimated tax payments for the fourth quarter of 2022 and all four quarters of 2023 are summarized below.

According to the IRS, individuals — including sole proprietors, partners and S corporation shareholders — generally must make estimated tax payments if they expect to owe $1,000 or more in tax when their return is filed.

Essentially, if you are self-employed or have passive streams of income — such as interest income, dividends and capital gains from asset disposals — you most likely need to make estimated tax payments each quarter.

That said, if you receive salaries and wages (W-2 earnings), you can avoid having to make estimated tax payments by asking your employer to withhold more federal tax from your earnings. To do so, you need to file a new Form W-4 with your employer and indicate the additional amount you want withheld.

If at filing time, you have not paid enough taxes through withholdings or estimated quarterly payments, you may have to pay a penalty for underpayment.

The most comprehensive way for a self-employed individual to estimate their quarterly tax obligation is to use Form 1040-ES, Estimated Tax for Individuals. Unfortunately, navigating the instructions can be quite cumbersome. Oftentimes, it entails assistance from a tax professional. If you are doing it alone and want a more straightforward approach, there are four steps you can follow.

This simplified approach will enable you to avoid the IRS’ penalty for underpayment. However, if your income has declined significantly since last year, a more precise estimation methodology is recommended.

Generally, quarterly tax payments should be made in four equal installments on or before the deadlines established by the IRS. However, fluctuating earnings can warrant unequal payments.

Regardless of your payment plan, there are several ways to remit your obligations.