Who Needs to Pay Estimated Taxes and When?
Learn who should make estimated tax payments, key deadlines to follow, and how to avoid penalties for underpayment throughout the year.
Taxes aren’t just a once-a-year obligation for everyone. Some individuals and businesses must make estimated tax payments throughout the year to avoid penalties when income isn’t subject to automatic withholding, such as self-employment earnings, rental income, or investment gains.
Understanding who needs to pay estimated taxes and when these payments are due can prevent unexpected bills and fines.
Individuals Earning Self-Employment Income
Self-employed individuals don’t have an employer withholding taxes from their earnings, making them responsible for estimated tax payments. This includes freelancers, independent contractors, gig workers, and small business owners who report income on Schedule C. They must pay both income tax and self-employment tax, which covers Social Security and Medicare contributions.
Self-employment tax is 15.3% of net earnings, with 12.4% allocated to Social Security and 2.9% to Medicare. In 2024, the Social Security portion applies to earnings up to $168,600, while the Medicare portion has no cap. Individuals earning over $200,000 ($250,000 for married couples filing jointly) owe an additional 0.9% Medicare surtax. These taxes are in addition to federal income tax, which varies based on total taxable income and filing status.
Estimated tax payments are due quarterly on April 15, June 17, September 16, and January 15 of the following year. To calculate these payments, self-employed individuals use IRS Form 1040-ES, which includes a worksheet to estimate tax liability based on expected income and deductions. Many use the prior year’s tax liability as a baseline, paying at least 100% of last year’s tax (or 110% for higher earners) to avoid underpayment penalties.
People with Non-Wage Earnings
Individuals receiving income outside of traditional paychecks often need to make estimated tax payments. This includes rental income, dividends, interest, capital gains, and taxable alimony from post-2018 divorce agreements. Since these earnings aren’t subject to automatic withholding, taxpayers must calculate and pay taxes throughout the year.
Investment income frequently triggers estimated tax obligations. Selling stocks at a profit results in capital gains tax. Short-term gains—on assets held for one year or less—are taxed at ordinary income rates, which can be as high as 37% in 2024. Long-term gains, from assets held longer than a year, are taxed at 0%, 15%, or 20%, depending on taxable income. Individuals with modified adjusted gross income above $200,000 ($250,000 for joint filers) may also owe the 3.8% Net Investment Income Tax (NIIT) on capital gains, dividends, and interest.
Rental income can also require estimated tax payments. Landlords must report rental earnings after deducting expenses such as mortgage interest, property taxes, maintenance, and depreciation. Similarly, those receiving royalties from book sales, patents, or mineral rights must account for taxes on these earnings, as they aren’t subject to withholding.
Partners and S Corporation Shareholders
Partners in partnerships and shareholders in S corporations don’t have tax withheld on their share of business income. Instead, they must report and pay taxes on their distributive share of profits, even if they don’t receive cash distributions. Since pass-through entities don’t pay federal income tax at the business level, tax responsibility falls on individual owners.
Partnerships and S corporations report income, deductions, and credits on Schedule K-1, which is issued to each partner or shareholder. The IRS requires these individuals to use this information when determining their estimated tax obligations. Even if profits are reinvested in the business, partners and shareholders must pay tax on their allocated share.
Certain types of income from pass-through entities can trigger additional tax liabilities. For example, partners receiving guaranteed payments for services rendered to the partnership must pay self-employment tax on those earnings. S corporation shareholders, however, don’t pay self-employment tax on their share of company profits but must receive reasonable compensation as W-2 wages if they actively work in the business. Underpaying themselves to avoid payroll taxes can lead to IRS scrutiny and penalties.
Those with Insufficient Withholding
Even individuals with traditional employment may need to make estimated tax payments if their withholding isn’t sufficient. This often happens with multiple jobs, bonuses, commissions, or incorrect W-4 withholding allowances. The IRS expects taxpayers to cover at least 90% of their current year’s tax bill—or 100% of the prior year’s liability (110% for higher earners)—through withholding and estimated payments to avoid penalties.
Stock compensation plans, such as restricted stock units (RSUs) and nonqualified stock options (NSOs), frequently cause under-withholding. Employers withhold some taxes when shares vest or options are exercised, but the default rate may be lower than the actual tax owed. For example, supplemental wage withholding is generally 22% (37% for amounts exceeding $1 million), which may be insufficient for high earners. Those who don’t adjust their withholding or make estimated tax payments could face a large tax bill when filing.
Potential Penalties for Missing Estimated Payments
Failing to make sufficient estimated tax payments can result in penalties, even if the total tax due is paid when filing. The IRS imposes underpayment penalties when taxpayers don’t meet the required thresholds—typically 90% of the current year’s tax liability or 100% of the prior year’s tax (110% for higher-income individuals). These penalties are based on the amount underpaid and the length of time the shortfall remains outstanding.
The penalty is calculated using the federal short-term interest rate plus 3%, which is adjusted quarterly. As of 2024, this rate is 8%, meaning underpayments can lead to significant additional costs. The IRS calculates the penalty on a quarterly basis, so even if a taxpayer catches up later in the year, they may still owe penalties for earlier missed payments. Some taxpayers may qualify for a waiver if the underpayment was due to unforeseen circumstances, such as a natural disaster or retirement, but these waivers are granted on a case-by-case basis.