How to Pay Estimated Quarterly Taxes for the First Time

Freelancers, independent contractors, and small business owners must pay estimated quarterly taxes since taxes are not withheld from their earnings. These payments cover income and self-employment taxes, helping to avoid a large tax bill in April.

Understanding how much to pay, when to send it, and the best method to use can be challenging. Missing deadlines or underpaying can lead to penalties, so learning the process early is essential.

Determining Payment Amounts

Quarterly tax payments are based on estimated annual tax liability. The IRS requires individuals to pay at least 90% of their current year’s tax bill or 100% of the previous year’s total tax to avoid penalties. For those with an adjusted gross income over $150,000, the threshold increases to 110% of the prior year’s tax.

To estimate payments, project total taxable income, including self-employment earnings and other sources. Subtract deductions like the standard deduction or itemized expenses, then apply federal tax brackets to estimate income tax liability. Self-employed individuals must also factor in self-employment tax, which covers Social Security and Medicare. In 2024, this tax is 15.3% on net earnings up to $168,600, with a 2.9% Medicare tax on income above that threshold.

Divide the total estimated tax liability by four to determine quarterly payments. If income fluctuates, IRS Form 1040-ES can help refine calculations. Some states also require estimated tax payments, so check with the state tax agency for additional obligations.

Establishing Payment Schedules

Quarterly tax payments are due on April 15, June 15, September 15, and January 15 of the following year. If a due date falls on a weekend or federal holiday, the deadline moves to the next business day. Missing deadlines can result in penalties, so setting reminders is helpful.

While the IRS expects equal installments, this may not work for those with irregular income. The annualized income installment method (IRS Form 2210) adjusts payments based on actual earnings, preventing overpayment during slow months while maintaining compliance.

State tax agencies may have different estimated tax schedules. Checking with the state department of revenue ensures all tax liabilities are accounted for, preventing unexpected penalties. Some states offer online portals where taxpayers can track due dates and review prior payments.

Methods to Send Payments

Once estimated tax amounts and due dates are determined, the next step is choosing how to submit payments. The IRS offers online platforms, traditional mail, and third-party services, each with different processing times, fees, and confirmation procedures.

Online Services

The IRS provides electronic payment options, with Direct Pay and the Electronic Federal Tax Payment System (EFTPS) being the most commonly used.

Direct Pay allows individuals to transfer funds directly from a checking or savings account without fees. Payments can be scheduled in advance, and users receive a confirmation number for record-keeping. However, this service does not support business tax payments, making it more suitable for sole proprietors and freelancers.

EFTPS offers additional features, including scheduling payments up to a year in advance and tracking payment history. Registration is required, and users receive a PIN by mail before accessing the system, so signing up well before a payment deadline is advisable. Businesses and individuals can both use EFTPS.

Credit and debit card payments are accepted through IRS-approved third-party processors, though they come with processing fees ranging from 1.87% to 1.98% for credit cards and a flat fee of $2.50 to $3.95 for debit cards. While convenient, the added cost should be considered.

Mail Options

For those who prefer traditional methods, estimated tax payments can be sent by mail using IRS Form 1040-ES. Payments should be made via check or money order, payable to the “United States Treasury,” and must include the taxpayer’s Social Security number (SSN) or Employer Identification Number (EIN), the tax year, and the notation “1040-ES” to ensure proper processing.

The IRS provides different mailing addresses depending on the taxpayer’s state of residence and whether a payment is included. These addresses are updated periodically, so verifying the correct destination on the IRS website before mailing a payment is recommended. To avoid late fees, ensure the envelope is postmarked by the due date. Using Certified Mail or a service with tracking provides proof of timely submission.

Processing times for mailed payments vary, typically taking several weeks to reflect in IRS records. If a payment is not credited within a reasonable timeframe, taxpayers can check their IRS account online or contact the agency to confirm receipt.

Third-Party Providers

Some taxpayers use third-party services such as PayPal, Venmo, or tax preparation software to submit estimated taxes. These platforms often integrate with IRS payment systems but may charge additional fees. PayPal and Venmo process tax payments through third-party providers, typically applying a 2% to 3% fee for credit card transactions.

Tax software like TurboTax, H&R Block, and TaxAct includes estimated tax payment features, allowing users to calculate and submit payments directly through the platform. This can be beneficial for those who want to automate the process, but it’s important to verify that payments are properly recorded with the IRS.

Some banks and financial institutions also offer tax payment services, particularly for business owners managing payroll taxes. These services may include automatic withdrawals or scheduled payments, reducing the risk of missed deadlines. However, users should confirm processing times and any associated costs before relying on these options.

Adjusting Payments for Income Changes

Fluctuating income can make it difficult to predict tax obligations. A rigid approach to estimated payments may result in overpaying, which ties up cash flow, or underpaying, which could create a financial burden when filing an annual return. Adjusting estimated tax payments throughout the year ensures better alignment with actual earnings.

Using accounting software or spreadsheets to monitor revenue, deductible expenses, and net earnings helps refine tax projections. Comparing current income trends to prior years can indicate whether adjustments are necessary. Those experiencing a sharp increase in earnings should revise payments upward to prevent a large tax liability at year-end, while those facing a slowdown can lower payments to free up capital.

Taxpayers who receive irregular lump-sum payments, such as bonuses or large client invoices, can make additional estimated payments outside the standard quarterly schedule. The IRS allows extra payments, helping to distribute tax liability more evenly rather than accumulating a substantial balance due in the final quarter.

Potential Penalties for Late or Insufficient Payments

Failing to make estimated tax payments on time or underpaying can result in financial penalties imposed by the IRS. These penalties encourage timely compliance and prevent taxpayers from deferring obligations until the annual filing deadline.

The failure-to-pay penalty applies when estimated tax payments are insufficient. The IRS calculates this penalty based on the amount underpaid and the length of time the shortfall remains outstanding. As of 2024, the penalty is determined using the federal short-term interest rate plus 3%, adjusted quarterly. The longer a payment is overdue, the more the penalty accrues. If a taxpayer owes more than $1,000 in taxes after accounting for withholdings and estimated payments, they may be subject to an underpayment penalty, even if they pay in full by the April filing deadline.

For those who miss a payment deadline entirely, the failure-to-pay timely penalty adds further costs. This penalty is 0.5% per month on the unpaid balance, up to a maximum of 25% of the total amount due. If payments are late but made within a reasonable period, penalties may be reduced or waived if the taxpayer can demonstrate reasonable cause, such as financial hardship or reliance on incorrect tax advice. Filing IRS Form 2210 allows taxpayers to request a waiver if they believe they qualify for an exception.