What are quarterly tax payments?
The United States’ tax system operates on a pay-as-you-go basis, meaning you must pay taxes as you earn or receive income during the year. There are two ways to pay as you go:
- Withholding: If you receive a W-2 salary, your taxes are withheld by your employer to pay federal and state taxes to the IRS on your behalf throughout the year. Taxes are usually withheld on other forms of income like pensions, bonuses, commissions, and gambling winnings.
- Estimated tax: Also referred to as quarterly tax payments, if you make income where taxes aren’t eligible to be withheld, you may have to pay estimated quarterly taxes. This can include income such as self-employment income, dividends, interest, capital gains, rental income, and royalties.
Because most W-2 income earners have their taxes withheld and only have to pay attention to their taxes once per year during tax season, many new business owners and self-employed individuals think that they, too, can just pay taxes in a lump sum payment when they file their taxes. But actually, taxes are due four separate times per year in the form of quarterly estimated tax payments. And if you don’t pay the enough, you may have to pay a penalty (even if you’re due a refund when you file your taxes).
Quarterly tax payments are a way to ensure that the government receives a steady stream of tax revenue throughout the year rather than having to wait until the annual tax deadline. This system helps to fund government operations, programs, and services on an ongoing basis.
Who needs to pay quarterly estimated payments?
Taxpayers who earn income that isn’t from an employer and isn’t eligible for withholding may need to make estimated tax payments.
The IRS lists a general rule to determine whether or not you’ll have to pay estimated tax for the tax year. If both of the following apply to you, you’ll have to pay quarterly taxes:
- You expect to owe at least $1,000 in taxes for the 2023 tax year, after subtracting your withholding and tax credits, when you file your return.
- You expect your withholding and tax credits to be less than the smaller of: 90% of the tax to be shown on your tax return, or 100% (110% if your 2023 AGI is over $150,000) of the tax shown on your 2022 tax return (must cover all 12 months of the 2022 tax year).
Quarterly tax payments are most commonly made by the following types of income earners
- Self-employed individuals: If you work for yourself and don’t have taxes withheld from your paychecks, you’ll likely need to make quarterly payments.
- Freelancers and independent contractors: If you receive 1099-MISC forms instead of W-2s, you’re responsible for paying their own taxes, often through quarterly payments.
- Business owners: If you run a business or are part of a corporation, partnership, or LLC, you may need to make quarterly payments on your business income.
- Sole proprietors and partnerships: If you operate as a sole proprietor or partner in a company, you typically need to make quarterly tax payments based on your share of the business income.
- Investors: If you generate capital gains or receive dividend income on your investments, you’ll have to pay quarterly tax payments.
- Landlords: If you general rental income, it’s not subject to withholding and you may be required to pay quarterly taxes.
- Corporations: Estimated tax payments need to be made if an incorporated business is expected to have at least $500 in taxes owed for the tax year.
Types of income eligible for quarterly tax payments
Any income that is not eligible for withholding (like W-2 income that would be withheld by your employer), is eligible for estimated quarterly taxes, including:
- Self-employment income
- Capital gains
- Rental income
- Prizes and awards
In some cases, W-2 income earners may also need to pay estimated tax payments
Because the amount of money that gets withheld is determined by the information you provide on your Form W-4, you may also need to make estimated tax payments if you receive a W-2 income but the withholding on your income doesn’t fully cover what you expect to owe at the end of the year. If this is the case, you can avoid quarterly tax payments by asking your employer to withhold more tax from your earnings by filing a new Form W-4.
Who does not need to pay quarterly estimated payments?
You do not need to pay estimated taxes if your expected tax liability is under $1,000 for the tax year.
Additionally, you are not required to pay if you meet all three of these conditions:
- You had no tax liability for the previous tax year, meaning your total tax was zero or you didn’t have to file a return.
- You were a US citizen or resident alien for the whole current tax year.
- Your previous tax year covered a 12 month period.
Deadlines: When are estimated taxes due?
Estimated tax payments are due four times per year and each payment deadline has a specific due date.
Typically the due dates fall on April 15, June 15, September 15, and January 15 unless they fall on a weekend or holiday.
- First payment deadline: April 15
- Second payment deadline: June 15
- Third payment deadline: September 15
- Fourth payment deadline: January 15 of the following year
Here are the quarterly tax payment deadlines for 2023:
|Payment period||Due date|
|Sept. 1 – Dec. 31, 2022.||Jan. 17, 2023.|
|Jan. 1 – Mar. 31, 2023.||April 18, 2023.|
|April 1 – May 31, 2023.||June 15, 2023.|
|June 1 – Aug. 31, 2023.||Sept. 15, 2023.|
|Sept. 1 – Dec. 31, 2023.||Jan. 16, 2024.|
What if I my fiscal year doesn’t begin on January 1?
If your business doesn’t follow the calendar year as its fiscal year, then you have different due dates.
- First payment deadline: The 15th day of the 4th month of your fiscal year.
- Second payment deadline: The 15th day of the 6th month of your fiscal year.
- Third payment deadline: The 15th day of the 9th month of your fiscal year.
- Fourth payment deadline: The 15th day of the 1st month after the end of your fiscal year.
If you file your income tax return by the last day of the first month after the end of your fiscal year, and pay all the taxes you with your return, you are not required to make the fourth payment.
Penalties for not paying estimated tax payments
If you don’t pay your estimated tax payments on time, or don’t pay enough, the IRS will charge you with an underpayment penalty on top of the taxes that you owe. The amount penalized will depend on how much you owe and how long you haven’t paid.
Typically, you’re charged with 0.5% of the unpaid amount every month that it it’s unpaid, up to a maximum of 25%. You’ll also be charged interest based on the interest rates published by the IRS, which they determine on a quarterly basis.
These are the interest rates charged based on the period of underpayment for 2023.
(Oct – Dec)
(Jul – Sep)
How to avoid the penalty
To avoid the penalty, you generally need to pay at least 90% of the current year’s taxes or 100% of last year’s taxes. If your adjusted gross income (AGI) is $150,000 or more, you’ll need to pay at least 90% of the current year’s taxes or 110% of last year’s taxes.
How will I know if I received a penalty?
The IRS will send you a notice informing you that you owe the Underpayment of Estimated Tax by Individuals Penalty.
How to pay estimated taxes
Pay by mail
To pay your estimated taxes to the IRS, fill out Form 1040-ES and mail it with a check or money order to the IRS office nearest you. There are three different mailing addresses for US residents, depending on where you live.
|If you live in…||and you are enclosing a payment use this address|
|Alabama, Arizona, Florida, Georgia, Louisiana, Mississippi, New Mexico, North Carolina, South Carolina, Tennessee, Texas||Internal Revenue Service|
P.O. Box 1300
Charlotte, NC 28201-1300
|Alaska, California, Colorado, Idaho, Hawaii, Kansas, Michigan, Montana, Nebraska, Nevada, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Utah, Washington, Wyoming||Internal Revenue Service|
P.O. Box 802502
Cincinnati, OH 45280-2502
|Arkansas, Connecticut, Delaware, District of Columbia, Illinois, Indiana, Iowa, Kentucky, Maryland, Maine, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, New York, Oklahoma, Rhode Island, Virginia, West Virginia, Vermont, Wisconsin||Internal Revenue Service|
P.O. Box 931100
Louisville, KY 40293-1100
If you’re a non-resident, mail it to the address below:
Internal Revenue Service
P. O. Box 1303
Charlotte, NC 28201-1303
How to report estimated tax payments made when you file your tax return
You can report all of your estimated tax payments on Form 1040, line 26. This should also include any overpayment that you elected to credit from your prior year’s tax return.