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- If you own a business or opt for a low withholding from your paycheck, you may have to pay quarterly taxes to avoid a penalty.
- The IRS allows you to pay your quarterly estimated taxes with an electronic funds transfer, debit card, or credit card online.
- Like everything tax-related, estimated taxes can be complicated. But there’s a simple way to pay enough to avoid penalties and interest.
- See Personal Finance Insider’s picks for the best tax software »
Taxes are a fact of life for most Americans. But if you’re self-employed, have a side hustle, or have a low withholding rate on your paychecks, you might need to pay your taxes four times per year instead of the once-annual filing those who work regular full-time jobs have to manage.
Income from capital gains, dividends, or distributions from your retirement account can also trigger an obligation to file estimated taxes, according to tax attorney Toby Mathis, a partner at Anderson Business Advisors.
Filing your quarterly estimated taxes is a fairly simple and straightforward process. If you may owe $1,000 or more when you file in April, you’ll want to follow these steps to avoid penalties and make your quarterly filing as easy as possible.
How to pay quarterly taxes
Don’t let estimated taxes scare you. We’ve broken the process down into five simple steps that make paying quarterly taxes a breeze.
Step 1: Determine whether you’re required to pay estimated taxes
The first step in paying your estimated taxes is figuring out whether you need to file quarterly in the first place.
Types of income that may require you to make quarterly payments include:
- Self-employment income, from a business you own or freelance work
- Contract work, including gig work or any job where you aren’t an employee with taxes withheld from your paycheck
- Dividends
- Capital gains
- Distributions from a retirement account
- W-2 wages, if you didn’t have enough tax taken out of your paycheck
Mathis notes that anyone who expects to pay more than $1,000 in taxes on all those income sources combined should plan to pay estimated taxes. If you meet these three conditions, the IRS doesn’t require you to make quarterly payments:
- You had no tax liability for the prior year
- You were a US citizen or resident for the whole year
- Your prior tax year covered a 12-month period
You can also skip estimated taxes and pay what you owe on April 15 if the taxes you owe are less than $1,000.
Another way to avoid estimated taxes, even if you do gig or contract work, is through increased withholding. If you work a combination of freelance gigs and jobs that withhold taxes, you can boost your withholding to cover what you will owe for your freelance work. Couples that file jointly can also use this technique if one spouse has a paycheck and the other is self-employed.
Step 2: Determine when to pay
If you do need to pay quarterly taxes, it’s important to pay on time to avoid late payment penalties and interest.
The four quarterly tax payments aren’t evenly spaced. Estimated tax payments are due as follows:
- January 1 to March 3: payment due on Tax Day, usually April 15
- April 1 to May 31: payment due June 15
- June 1 to August 31: payment due September 15
- September 1 to December 31: payment due January 15 of the following year
When any of these due dates falls on a weekend or a federal holiday, your taxes will be due the following day. If you pay by check, your check just needs to be postmarked by the due date.
According to the IRS, special rules apply for farmers and fishermen.
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Step 3: Estimate your tax liability
Once you’ve determined you’re required to pay quarterly taxes and when you need to pay them, it’s time to calculate how much you’ll owe.
The potentially huge number of inputs used in your final tax return can take hours to put together using tax prep software, depending on the complexity of your finances. Fortunately, the quarterly tax process is much simpler.
It’s better to estimate a little high than estimate low, as any excess taxes paid will come back in your refund. But if you underpay, you may end up facing underpayment penalties.
If you want to be conservative to avoid penalties and err on the side of a larger refund and keep the math simple, you can make your entire tax payment based on your top estimated tax bracket for the year. Multiply your quarterly revenue by four, look at the year-to-date trend, or compare to last year’s full-year results to get a reasonable proxy for your tax bracket.
Multiply your quarterly results by your tax bracket to get a number you may use for your payment.
If you use tax prep software or have an accountant do your taxes, your return from the prior year may come with estimated tax payment slips that tell you what you should pay.
You may also make your tax payments based on last year’s results. This gives you “safe harbor” protection from penalties and interest, even if you owe more than $1,000 at tax time.
Paying based on last year’s taxes is called the annualized income installment and most people who use this method will make four equal quarterly payments. However, the IRS will also let seasonal businesses use the adjusted seasonal installment method to make payments of differing amounts, based on the percent of your income in each quarter.
Step 4: Decide how you want to pay
Now you know how much you’ll pay. So now it’s time to get to work entering that payment. The IRS gives you several options on how to pay:
- You can pay for free with a bank account transfer from your bank account or use a credit card for a fee. The systems used to pay for free are called Direct Pay as well as Electronic Federal Tax Payment System (EFTPS), which requires enrollment. You just need some basic information about yourself and info from your most recent return to complete the payment process. You can schedule these payments in advance, so you never miss a quarterly payment deadline.
- You can send an estimated payment in the mail along with Form 1040-ES.
- You can pay on your mobile device using the IRS2Go app.
- You can also pay over the phone.
Just keep in mind that paying with a credit card incurs a fee. It’s a better idea to use Direct Pay rather than a debit card, but there are some situations where the fee is worthwhile on a credit card. If you’re working on a big signup bonus on a new card, for example, you could pay your taxes with your card and it will count as a purchase toward the bonus.
However, unless you have some good rewards coming your way, the fee is higher than the rewards you’ll get back. Pay1040.com is currently the lowest-cost credit card processor to pay your taxes.
Step 5: Check the IRS website to see your payment reflected
Did you know the IRS has a website where you can view information about prior year taxes, balances due, and payments on your account? Head over to the IRS website to view your tax account.
While this step is optional, it’s not a bad idea to log in the following day to make sure your payment is reflected properly.
Congrats, you’re all done! But before you put your quarterly estimated taxes completely behind you, take a moment to write down the next due date so you stay on track. Keep in mind that you may also need to make estimated tax payments to your state, so be sure to look up your state’s guidelines for calculating and making your estimated payments, as well as the due dates, as these may differ from the IRS’s.
As long as you meet the minimums and don’t miss the quarterly due dates, you should be all clear of penalties. And, if you do accidentally pay a little extra, you’ll always get it back when you file your tax return.
The bottom line
Quarterly tax payments don’t have to be a hassle. There are simple ways to calculate what you owe to avoid interest and penalties. Plus, paying throughout the year keeps you fiscally responsible, so you don’t end up with an unmanageable bill on tax day.
