Estimated Tax Payments
Definition
Estimated tax payments are periodic tax payments made by individuals and businesses throughout the year on income that is not subject to withholding, such as self-employment income.
Explanation
The IRS requires taxpayers to pay taxes as they earn income throughout the year. Estimated tax payments are typically made quarterly by freelancers, independent contractors, and business owners. Failure to make adequate payments can result in penalties and interest.
To calculate estimated payments, taxpayers project their annual income, deductions, and credits, then divide the expected tax liability by four. The IRS provides Form 1040-ES for individuals and Form 1120-W for corporations.
Example
A freelance writer expects to owe $12,000 in taxes for the year. They make quarterly estimated tax payments of $3,000 in April, June, September, and January.