Your Guide to Paying Estimated Taxes the Right Way

The federal tax system generally follows the "pay-as-you-go" method. Individuals must pay income taxes through withholding or estimated taxes. Employed individuals often have taxes withheld from each paycheck. Meanwhile, any taxpayer earning income not subject to withholding tax must make estimated tax payments.

This article explains the important aspects of paying estimated taxes, whether you are self-employed, receiving dividends and interests, or earning rental income.

What are Estimated Taxes?

The Internal Revenue Service (IRS) uses estimated taxes as a method for taxpayers to pay tax income that is not subject to income tax withholding. This income includes earnings from alimony, dividends, interest, rent, and self-employment.

You must also pay estimated taxes if you opt out of withholding income tax on other taxable income. Other taxable incomes include a taxable sum of your Social Security and unemployment benefits.

Estimated taxes go towards both the federal income tax and self-employment tax.

Who Must Pay Estimated Taxes?

The following people generally pay estimated taxes:

• Sole proprietors
• Business partners
• S corporation shareholders
• Corporations

S corporation shareholders pay estimated taxes if they expect to owe a federal tax of $1,000 or more for the year. Meanwhile, corporations use estimated taxes if they expect to owe a federal tax of $500 or more for the calendar year.

Who is Exempt from Paying Estimated Taxes?

You can enjoy an exemption from paying estimated taxes if you qualify for any of the following:

• You had no tax liability in the previous year (you did not have to file a tax return, or your tax liability was zero)
• You were not a U.S. citizen or resident for the entire year
• Your income tax return in the previous year did not cover a full 12 months

What is the Self-Employment Tax?

The IRS defines a self-employed individual as a person who:

• Has a trade or business as a sole proprietor or an independent contractor
• Is a member of a partnership or limited liability company that carries on a trade or business
• Runs a business for themselves, such as having a small business and a regular job

Self-employed individuals pay a self-employment tax (SE) on the net income earned from a business.

• Net income is the gross income after the deduction of allowable business expenses.
• The SE tax is a flat tax rate of 15.3% (12.4% for Social Security plus 2.9% for Medicare).

The SE tax applies to all self-employed individuals regardless of income. However, earnings that exceed a certain amount are not subject to the Social Security portion of the tax. For 2025, that amount is $176,100.

In addition, a self-employed individual can deduct half of the SE tax from their adjusted gross income, which decreases the income tax.

How to Calculate Estimated Taxes

The easiest way to calculate estimated taxes for the current year is to use the tax return from the prior year. To avoid penalties, a taxpayer should make estimated tax payments that are at least equal to one of the following:

• 90% of the total tax liability for the current year
• 100% of the tax liability for the previous year (or 110% for high-income tax filers)

Partners, sole proprietors, and S-Corporation shareholders often use Form 1040-ES to calculate their estimated taxes. Form 1040-ES(NR) is the proper form for nonresident aliens. For tax purposes, "nonresident alien" means any individual who is not a U.S. citizen or a U.S. resident.

To calculate your estimated income tax, you must assess your expected adjusted tax credits, deductions, gross income, and taxable income for the year. You must also determine the income you expect to earn for the year.

When estimating the amount of tax, it is helpful to start by looking at the prior year's tax data as a baseline. You can also use Form 1040-ES to calculate your estimated tax. If your estimated earnings are too high or too low, you can use another Form 1040-ES new worksheet to help you correct or adjust your estimated taxes. Proper income estimation is crucial to avoid underpayment penalties.

When to Pay Estimated Taxes

The IRS divides the payment of estimated taxes into four installment periods. Each installment period has a coinciding due date. The table below outlines the general payment schedule for estimated taxes.

The estimated tax on income earned during a period is due in its entirety by the installment due date or can be paid in installments. However, the IRS only requires the payment of estimated taxes once a taxpayer has earned income.

If, for example, a taxpayer does not earn income during the first installment period, making an estimated tax payment is unnecessary. When the taxpayer does earn income, the taxpayer must pay the entire estimated tax by the applicable due date for the period, or may pay the estimated tax payment in installments.

How to Pay Estimated Taxes

The IRS provides taxpayers with several ways to make payments. For instance, you can pay by mail, online, or using the Form 1040-ES. Other ways to pay estimated taxes also include the following:

• Crediting an overpayment from the previous tax year to the estimated tax liability
• Sending in the payment with Form 1040-ES
• Paying by Electronic Funds Transfer when electronically filing a tax return
• Paying electronically through the Electronic Federal Tax Payment System (EFTPS)
• Paying over the phone or by using the IRS2Go mobile app

For more information about how to pay your estimated taxes, you can visit IRS Publication 505 for individuals and Publication 542 for corporations.

What are the Penalties for Not Paying Estimated Taxes?

The IRS sends different letters and notices for different types of penalties. Some of the most common include:

• Failure to file: When you fail to file your tax return on the due date.
• Failure to pay: When you fail to pay your taxes on the due date.
• Information return penalty: If you fail to file or do not provide the payee statement or information return on time.
• Accuracy-related penalty: If you fail to report all your taxable income or claim deductions or credits.
• Erroneous claim for tax credit or refund: If you claim a tax credit or refund for income tax more than what you are qualified for.
• Failure to deposit: If there are delays or inaccuracies in paying employment taxes.
• Tax preparation penalties: This penalty is given to preparers who commit misconduct in preparing or filing taxes.
• Underpayment of estimated taxes: If individuals or corporations fail to pay their estimated taxes on time or accurately.

If you fail to pay your estimated taxes, the base penalty is 0.5% of the unpaid taxes every month or part of a month that stays unpaid. This penalty accumulates up to 25% of your unpaid taxes.

If you were on time in filing your tax return as an individual and have an approved payment plan, the IRS will reduce the penalty of failure to pay from 0.5% to 0.25% each month or as part of the duration of your payment plan.

If the IRS sends you a notice of intent to levy and you fail to pay your taxes within 10 days of receiving the notice, your penalty increases to 1% each month or part of a month.

Note that the IRS applies total monthly charges on their penalty even if you pay your outstanding tax before the end of the month.

Consult with an Attorney to Learn More About Paying Estimated Taxes

Anytime we hear the word "taxes," it can evoke strong emotions, either fear-based or confusion as to what taxes you should be paying and your estimated tax burden. But do not let this fear and uncertainty prevent you from taking control of the situation. Contact a tax attorney who can offer personalized legal advice to ensure you meet your obligations with your federal tax return.