Quarterly taxes

What Are Quarterly Taxes?

Quarterly taxes are periodic payments of income tax, self-employment tax, and other taxes made to the Internal Revenue Service (IRS) by individuals who do not have taxes withheld from their regular paychecks. This system, falling under the broader financial category of taxation, ensures that taxpayers pay income tax as they earn or receive income throughout the year, rather than a single lump sum at year-end. This is particularly relevant for self-employment income, income from investments, or other income not subject to withholding. Individuals, including sole proprietors, partners, and S corporation shareholders, typically need to make quarterly taxes if they expect to owe at least $1,000 in tax for the current year.¹⁹

History and Origin

The concept of paying taxes throughout the year, rather than a single annual payment, became a cornerstone of the U.S. tax system during World War II. Prior to this, many taxpayers would pay their entire tax liability at the end of the tax year. To finance the war effort and ensure a consistent revenue stream, Congress introduced payroll withholding and quarterly tax payments. This shift aimed to align the timing of tax payments more closely with the earning of income. Since then, the pay-as-you-go system has been a fundamental aspect of U.S. tax compliance.

Key Takeaways

• Quarterly taxes are estimated payments made by individuals and businesses on income not subject to withholding.
• They typically cover federal income tax, self-employment tax (Social Security and Medicare), and sometimes state income tax.
• Payments are generally due in January, April, June, and September for income earned in the preceding quarter.
• Failure to pay sufficient quarterly taxes can result in an underpayment penalty.
• Accurate estimation of taxable income and deductions is crucial to avoid penalties.

Calculating Quarterly Taxes

While there isn't a single universal formula for quarterly taxes, the process involves estimating your total tax liability for the year. Taxpayers use Form 1040-ES, Estimated Tax for Individuals, to calculate their anticipated tax obligations.¹⁸

The general approach is to:

1. Estimate your total expected adjusted gross income for the year.
2. Subtract any anticipated tax deductions and credits to arrive at your estimated taxable income.
3. Calculate your estimated total tax, including income tax, self-employment tax (which covers Social Security and Medicare), and any other applicable taxes.
4. Subtract any expected withholdings and tax credits to determine your net estimated tax due.
5. Divide this net estimated tax by four to determine the amount for each quarterly payment.¹⁷

If your income varies significantly throughout the year (e.g., from seasonal work or large capital gains), you may use the annualized income installment method to adjust your payments, potentially avoiding or lowering penalties.¹⁶

Interpreting Quarterly Taxes

Interpreting quarterly taxes primarily involves ensuring that estimated payments sufficiently cover one's annual tax obligations to avoid penalties. The IRS generally requires taxpayers to pay at least 90% of their current year's tax liability or 100% of their prior year's tax liability (110% for higher-income taxpayers) through withholding and estimated payments.¹⁵,¹⁴

For taxpayers with variable income, monitoring earnings throughout the year is essential to adjust quarterly tax payments as needed. If initial estimates prove too low due to unexpected income or reduced tax deductions, subsequent payments should be increased. Conversely, if income is lower than anticipated, payments can be reduced. Tools and worksheets provided by the IRS, such as Form 1040-ES, are critical for this ongoing assessment.

Hypothetical Example

Consider Sarah, a freelance graphic designer. In 2025, she expects to earn $60,000 in net earnings from her design work, which is not subject to withholding. Based on her income, deductions, and credits, she estimates her total federal tax liability (including income tax and self-employment tax) will be $12,000 for the year.

To fulfill her quarterly taxes obligation, Sarah would divide her estimated annual tax liability by four:

$\frac{\$12,000}{4} = \$3,000$

Sarah would aim to make four estimated tax payments of $3,000 each by the respective due dates: April 15, June 15, September 15, and January 15 of the following year. If, later in the year, she lands a large project and anticipates her total income to be higher, she would re-estimate her annual tax liability and adjust her remaining quarterly payments upward to avoid an underpayment penalty.

Practical Applications

Quarterly taxes are a critical component of financial planning for various individuals and entities. They are most commonly applied to:

• Self-Employed Individuals and Small Business Owners: Freelancers, consultants, and sole proprietors, who receive income directly without employer withholding, must pay quarterly taxes to cover their income and self-employment taxes. This is a primary method for them to meet their tax obligations.¹³
• Independent Contractors: Similar to self-employed individuals, independent contractors receiving Form 1099 income are responsible for making estimated payments.
• Investors: Individuals with significant income from investments, such as interest, dividends, or capital gains, which are typically not subject to withholding, often need to pay quarterly taxes.
• Retirees: Retirees receiving pension or annuity income, or those with substantial income from Individual Retirement Accounts (IRAs) or other retirement plans, may also be required to make estimated payments if their withholdings do not cover their tax burden.
• Rental Property Owners: Income from rental properties is generally not subject to withholding, necessitating quarterly tax payments for landlords.¹²

The IRS provides detailed guidance on who must pay estimated taxes and how to calculate them, which is accessible on their official website.¹¹

Limitations and Criticisms

One of the primary challenges of quarterly taxes is the requirement to accurately estimate future income and deductions. This can be difficult, especially for individuals with fluctuating earnings, such as a freelancer or a small business owner. Overestimating can tie up funds that could be used elsewhere, while underestimating can lead to an underpayment penalty.¹⁰

The complexity of navigating different income sources, deductions, and credits can also be a limitation. While the IRS provides forms like Form 1040-ES and Form 2210 (Underpayment of Estimated Tax by Individuals, Estates, and Trusts) to assist, the process requires careful record-keeping and financial foresight.⁹ Taxpayers may also face penalties if payments are made late, even if the total amount paid by year-end is sufficient.⁸ For some, the administrative burden of calculating, tracking, and making four separate payments throughout the year can be a significant drawback.

Quarterly Taxes vs. Tax Withholding

Quarterly taxes and tax withholding are both methods for taxpayers to meet their federal tax obligations on a "pay-as-you-go" basis, but they apply to different income scenarios.

The primary point of confusion often arises when individuals transition from traditional employment (with withholding) to self-employment or acquire significant non-wage income, as they suddenly become responsible for actively managing their tax payments through quarterly taxes.

FAQs

Who needs to pay quarterly taxes?

Generally, individuals who expect to owe at least $1,000 in federal tax for the year, after subtracting any withholding and refundable tax credits, must pay quarterly taxes. This commonly includes freelancers, self-employed individuals, independent contractors, and those with substantial income from investments or rental properties.⁷,⁶

When are quarterly tax payments due?

For federal taxes in the U.S., the year is divided into four payment periods, each with a specific due date. While dates can slightly shift if they fall on a weekend or holiday, they are typically:

• April 15: For income earned January 1 to March 31.
• June 15: For income earned April 1 to May 31.
• September 15: For income earned June 1 to August 31.
• January 15 of next year: For income earned September 1 to December 31.⁵,⁴

What happens if I don't pay enough quarterly taxes?

If you don't pay enough quarterly taxes throughout the year, you may be subject to an underpayment penalty from the IRS. This penalty is calculated based on the amount of the underpayment, the period it was underpaid, and quarterly interest rates.³ The penalty can often be avoided if you owe less than $1,000 in tax after subtracting your withholding and refundable credits, or if you paid at least 90% of the tax for the current year or 100% of the tax shown on your prior year's tax return.²

Can I pay my quarterly taxes all at once?

While technically possible to pay all your estimated taxes by the first due date (April 15), it is generally not recommended unless you are certain of your full year's income. This is because you could still incur an underpayment penalty for the later payment periods if your income isn't earned evenly throughout the year. Spreading the payments out typically helps manage cash flow and reduces the risk of penalties.¹

Do quarterly taxes apply to state income taxes too?

Yes, in states that have an income tax, you may also be required to make estimated state tax payments on a quarterly basis, similar to federal quarterly taxes. The specific rules and due dates can vary by state, so it's important to consult your state's tax agency for details.