If you are self-employed or running a business, the IRS does not wait until April to collect what you owe. Here is how quarterly estimated taxes work and how to avoid being caught off guard.
When you have an employer, they withhold taxes from every paycheck. When you are self-employed, nobody is doing that for you. The IRS requires you to estimate and pay your own tax four times a year instead of all at once in April.
Generally, if you expect to owe $1,000 or more in federal tax for the year, you are required to make estimated payments. Most freelancers, consultants, and small business owners cross this threshold.
Common misconception: Paying everything in April does not avoid the requirement. The IRS can charge an underpayment penalty even if your return shows a refund, because the payments were supposed to be spread across the year.
Self-employment tax is 15.3% of your net business income, on top of regular income tax. This covers both sides of Social Security and Medicare. Estimating only income tax and forgetting self-employment tax is one of the most common causes of a large April bill.
We calculate and track quarterly estimates for all our tax clients.
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