Publication 784: Preparing a Declaration of Estimated Tax

The U.S. tax system operates on a pay-as-you-go basis, meaning you are required to pay tax on income as you receive it throughout the year. For many, this is handled through employer withholding. However, if you receive income not subject to withholding, such as from self-employment, investments, or as a partner, you may need to pay estimated tax. These quarterly payments cover income tax, self-employment tax, and the alternative minimum tax. The Internal Revenue Service (IRS) provides guidance to help taxpayers determine if they have an obligation to make these payments and how to calculate them.

Determining Your Requirement to Pay Estimated Tax

To determine if you must pay estimated tax, you need to assess your expected tax liability for the year. You are required to make these payments if you anticipate owing at least $1,000 in tax after accounting for any taxes withheld and refundable credits. Beyond the $1,000 threshold, your withholding and credits must be less than the smaller of two amounts: 90% of the tax you expect to owe for the current year, or 100% of the tax shown on your prior year’s return.

For taxpayers with a higher adjusted gross income—over $150,000—the prior-year requirement increases to 110% of the previous year’s tax. This rule is often called a “safe harbor,” providing a clear benchmark. This payment requirement applies to individuals whose income is not subject to withholding, such as sole proprietors, partners, and those earning significant income from interest, dividends, or rent.

Calculating Your Estimated Tax Payment

To calculate your estimated tax, use the worksheet in Form 1040-ES, Estimated Tax for Individuals. You will need to project your financial activity for the entire year, using your prior year’s federal tax return as a helpful starting point for income, deductions, and credits.

The worksheet requires you to estimate your adjusted gross income (AGI) by totaling all expected income and subtracting specific deductions. Next, you will subtract either your expected standard deduction or estimated itemized deductions to arrive at your taxable income. After calculating your projected income tax, you will account for any tax credits you expect to claim and other taxes, such as self-employment tax.

For those with steady income, the total estimated tax is divided by four for equal quarterly payments. If your income is received unevenly, the IRS permits an annualized income installment method, which allows you to adjust payment amounts each quarter based on income earned during that period. If your initial estimate proves to be too high or too low, you can complete a new Form 1040-ES worksheet to refigure your payments for the remaining quarters.

Completing Form 1040-ES and Making Payments

Once you have calculated your required quarterly payment, you must submit it to the IRS. To pay by mail, complete one of the payment vouchers included in the Form 1040-ES package. Each voucher requires your name, address, Social Security number, and the payment amount, and should be mailed with a check or money order to the address in the form’s instructions.

The IRS offers several electronic payment methods as alternatives to mailing a check. You can pay directly from your bank account using the free services IRS Direct Pay or the Electronic Federal Tax Payment System (EFTPS). Other options include:

• Debit card
• Credit card
• Digital wallet

Be aware that third-party processing fees may apply for these card and digital wallet payments.

Payments are due in four quarterly installments: April 15, June 16, September 15, and January 15 of the following year. If any of these dates fall on a weekend or a legal holiday, the deadline shifts to the next business day. The Form 1040-ES worksheet is for your records and does not need to be filed.

Underpayment Penalties and Exceptions

Failing to pay enough tax throughout the year can result in a penalty for underpayment. The penalty amount is calculated based on the amount of the underpayment, the period it was underpaid, and the applicable interest rate, which can change quarterly. You can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to determine the penalty, or you can have the IRS calculate it and send a bill.

The most direct way to avoid an underpayment penalty is to meet one of the “safe harbor” thresholds discussed earlier. As long as your combined withholding and timely estimated payments meet one of these minimums, no penalty will be applied. Additionally, if your total tax due after subtracting withholding and credits is less than $1,000, the penalty is waived.

The IRS may also waive the penalty under specific circumstances, such as a casualty, disaster, or other unusual event. A waiver may also be granted if you retired after reaching age 62 or became disabled during the tax year, provided the underpayment was due to reasonable cause and not willful neglect. To request such a waiver, you must file Form 2210 and provide a statement explaining the circumstances.