Do Quarterly Estimated Taxes Have to Be Equal?

Estimated taxes are payments made throughout the year to cover income not subject to withholding, such as earnings from self-employment, interest, dividends, rental income, or alimony. The United States operates on a “pay-as-you-go” tax system, meaning taxes should be paid as income is earned or received. For many, this happens automatically through employer withholding from paychecks. However, for those with other income sources, estimated taxes ensure tax obligations are met incrementally. Quarterly estimated tax payments do not necessarily have to be equal; the amount paid depends on when income is received throughout the year.

Who Pays Estimated Taxes

Individuals, including sole proprietors, partners, and S corporation shareholders, need to pay estimated taxes if they expect to owe at least $1,000 in tax for the year. This threshold applies after accounting for any withholding and refundable credits. This applies to those whose income tax is not sufficiently covered by withholding, or who receive income from sources like gig work, capital gains, prizes, or unemployment compensation. Corporations also have an estimated tax obligation if they anticipate owing $500 or more in tax.

Calculating Your Estimated Tax

Calculating estimated tax involves projecting your total income, deductions, and credits to determine your overall tax liability. A helpful starting point for this estimation is your previous year’s tax return, as it provides a baseline. You should factor in all expected income sources, such as self-employment earnings and investment income, and consider any anticipated deductions that will reduce your taxable income. Form 1040-ES, Estimated Tax for Individuals, includes a worksheet to guide taxpayers through this calculation.

The Annualized Income Method

The annualized income method addresses situations where income varies significantly throughout the year, preventing the need for equal quarterly estimated tax payments. It is useful for taxpayers with seasonal businesses, large bonuses late in the year, or uneven income flow. It allows calculation of tax liability based on income actually earned during each payment period, rather than assuming even income. This approach allows adjustment of quarterly payments to align with income, potentially reducing or eliminating underpayment penalties. Form 2210, Schedule AI (Annualized Income Installment Method), helps determine the required payment for each period by annualizing income up to that point.

Making Estimated Tax Payments

Estimated tax payments for individuals are due quarterly, though periods do not align with calendar quarters. The typical due dates are April 15 for income earned January through March, June 15 for income earned April through May, September 15 for income earned June through August, and January 15 of the following year for income earned September through December. If a due date falls on a weekend or holiday, the deadline shifts to the next business day. Payments can be made via IRS Direct Pay, the Electronic Federal Tax Payment System (EFTPS), mail with Form 1040-ES payment vouchers, or credit/debit card. A prior year’s refund can also be applied to estimated taxes for the upcoming year.

Avoiding Underpayment Penalties

Underpayment penalties are assessed if you do not pay enough tax through withholding or estimated taxes. To avoid penalties, taxpayers must meet “safe harbor” rules.

A penalty is avoided if you owe less than $1,000 after subtracting withholding and credits. Alternatively, pay at least 90% of your current year’s tax liability or 100% of your prior year’s tax liability, whichever is smaller. For higher-income taxpayers (AGI exceeding $150,000 in the prior year), the safe harbor rule for prior year’s tax increases to 110%.

Penalties may also be waived due to casualty, disaster, disability, or if you retired after age 62 in the current or preceding tax year. The annualized income method also helps avoid penalties if income is received unevenly.