Paying Estimated Taxes

Independent contractors and self-employed workers have to pay estimated taxes every quarter.

By , J.D.

Self-employed workers have to pay taxes, just like everyone else. And they don't have the luxury of waiting until April 15 to pay all of their taxes for the previous year—the IRS wants its money faster than that. Self-employed people and independent contractors have to pay tax on their estimated annual income in four payments, spread out over each year. These payments are called "estimated taxes" and are used to cover income taxes and self-employment taxes (Social Security and Medicare taxes).

Because of this estimated tax requirement, you need to budget your money carefully. If you don't set aside enough of your earnings to pay your estimated taxes, you could face a huge tax bill on April 15 and possibly penalties for not paying estimated taxes. You might also have a tough time coming up with the money to cover the amount you owe.

Who Must Pay Estimated Taxes?

If like the vast majority of self-employed people, you are a sole proprietor (that is, you own your own business), you have to pay estimated taxes if you expect to owe at least $1,000 in federal tax for the year.

But if you didn't have to pay any taxes last year, say, because your business didn't make a profit or because you weren't working, you don't have to pay any estimated tax this year, no matter what you earn. This rule applies only if you were a U.S. citizen or resident for the year and your tax return for the previous year covered the entire 12 months.

How Much Estimated Tax You Must Pay

You should figure out how much estimated tax to pay after completing your tax return for the previous year. Most people want to pay as little estimated tax as possible, so they can earn interest on their money instead of handing it over to the IRS. However, the IRS imposes penalties if you don't pay enough estimated tax. You can avoid these penalties by paying the lesser of:

  • 90% of your total tax due for the current year, or
  • 100% of the tax you paid the previous year (or possibly more, if you're a high-income taxpayer).

When to Pay Estimated Tax

You usually have to pay estimated tax in four installments, starting on April 15. But you don't have to start making payments until you actually earn income. If you don't receive any income by March 31, you can skip the April 15 payment and make only three payments for the year, starting on June 15. If you don't receive any income by May 31, you can skip the June 15 payment as well, and so on.

Here are the due dates and periods covered for each installment payment:

Income Received for the Period Estimated Tax Due

January 1 through March 31

April 15

April 1 through May 31

June 15

June 1 through August 31

September 15

September 1 through December 31

January 15 of next year

How to Make Your Estimated Tax Payments

By far, the easiest, quickest, and simplest way to pay estimated tax is through an electronic funds withdrawal from your bank account using the IRS Direct Pay service. This service is a free and secure way to have your estimated taxes paid directly from your checking or savings account. You'll receive instant confirmation that your payment has been submitted to the IRS. Your bank account information isn't retained in IRS systems after payments are made. Direct Pay is easy to use, and you don't have to preregister.

You can also pay by mail with a check or money order. Send the IRS an IRS Form 1040-ES. This form contains instructions, and four numbered payment vouchers to send in with your payments. If you made estimated tax payments by mail last year, you should receive a copy of the current year's Form 1040-ES in the mail. It will have payment vouchers preprinted with your name, address, and Social Security number. If you didn't pay estimated taxes last year, get a copy of Form 1040-ES from the IRS website at www.irs.gov.

You may also pay your estimated taxes by credit card or debit card through a private company that provides this service. You'll have to pay the company a fee based on the amount of your payment (the fee doesn't go to the IRS). You can arrange to make your payment by phone or through the Internet. For details, see the IRS web page Pay Your Taxes by Debit or Credit Card.

Penalties for Underpaying Your Estimated Taxes

The IRS imposes a fine if you underpay your estimated taxes. You have to pay the taxes due plus a percentage penalty for each day your estimated taxes went unpaid. The IRS sets this percentage each year. Currently, it is 3% annually (2021).

This penalty is often less than the interest you'd have to pay on borrowed money. Many self-employed people decide to pay the penalty at the end of the year rather than taking money out of their businesses during the year to pay estimated taxes. If you decide to follow their lead, make sure you pay all of the taxes you owe for the year by April 15 of the following year. If you don't, the IRS will tack on additional interest and penalties and quickly make it prohibitively expensive to pay late.

Learn More

For additional information about paying estimated taxes and other rules for independent contractors, get Working for Yourself: Law & Taxes for Independent Contractors, Freelancers & Consultants, by Stephen Fishman (Nolo).

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