If your employer withholds money from your paychecks for federal and state income taxes you may not think much about taxes until you file your return each year. But there are other types of income for which you don’t have taxes withheld, such as self-employment and large capital gains.
You’re required to pay taxes on your income as you earn it throughout the year — and you may end up with a big tax bill and penalty if you wait until you file your tax return to pay them.
You can avoid the penalty, however, by paying quarterly income taxes — keep reading to find out how.
Who Needs to Pay Quarterly Taxes?
You should consider paying quarterly taxes if you don’t have taxes withheld from some of your income or you don’t have enough withheld from your pay to cover your tax bill.
“The IRS expects that anyone who will owe $1,000 on their tax return because previous tax payments and withholding were insufficient should make estimated tax payments,” Mary Kay Foss, certified public accountant in Walnut Creek, California, says.
You may need to make quarterly tax payments if you fall into any of the following categories:
You’re Self-Employed
Taxes typically aren’t withheld from self-employment income, so if you do any freelance, consulting or gig work you should either file quarterly income taxes or increase your withholding on other types of income.
“Although you might not identify yourself as a business owner, if you’re receiving income from a company where you aren’t an official employee, you’ll likely receive a 1099-NEC early next year to report the income you earned on your taxes,” Natalie Taylor, certified financial planner and behavioral financial advisor in Santa Barbara, California, says.
Small business owners typically need to make estimated quarterly tax payments, too.
“Even if you don’t take funds out of a business account in the quarter, you’ll typically have estimated payments to make if your revenue was more than your expenses,” Taylor says.
[READ: A Guide to Tax Deductions for the Self-Employed]
You’ve Realized Large Capital Gains
Sales of investments for a profit — like stock, mutual fund and taxable real estate sales — are subject to capital gains taxes.
“If you sell an investment at a substantial gain, you might trigger capital gains taxes,” Taylor says. “Any realized capital gains that can’t be offset by exclusions or capital losses are generally taxable and can be a trigger for making quarterly tax payments.”
You’ve Made Taxable Withdrawals From Retirement Accounts
You also need to think about how to pay taxes if you’ve been saving in a tax-deferred retirement account, like a traditional IRA, and you make taxable withdrawals.
You can either make quarterly estimated tax payments or ask your IRA administrator to withhold money for taxes from your withdrawals. “Withholding from IRA withdrawals is voluntary,” Foss says.
[READ: How to Pay Less Tax on Retirement Account Withdrawals.]
You Earn High Social Security Benefits
If you earn enough Social Security, your benefits will be taxable. You can request taxes be withheld or pay quarterly taxes.
You Have Restricted Stock Units Vesting
If you have RSUs vesting this year, federal tax withholding of 22% will automatically apply (for vesting amounts less than $1 million; amounts more than $1 million are withheld at 37%), Taylor says.
“If your effective tax rate is above 22% for the year, quarterly tax payments can help you pay the remaining tax you owe to the IRS to avoid both underpayment penalties and a large tax bill come April of next year,” she adds.
You Exercise Stock Options
If you exercise stock options this year you may trigger taxes, Taylor says. “For nonqualified stock options, income tax is triggered on the difference between your option exercise price and the fair market value of the stock on the date of exercise.”
“Similar to RSUs, tax withholding is typically done at 22% for federal purposes, which may or may not be enough. Quarterly tax payments can help you pay the remaining tax you owe,” she says.
You Receive Other Large Income Payments
You may also want to make quarterly estimated tax payments if you receive significant income from other sources without withholding, such as rental income, non-employee compensation or royalties, Mitchell Freedman, CPA and personal financial specialist in Westlake Village, California, says.
In addition, consider making quarterly payments if you receive a bonus at work but the amount withheld for taxes is lower than your tax bracket.
[New Income Tax Brackets for 2023 May Save You Money]
When Are Quarterly Taxes Due?
Quarterly taxes aren’t actually due every three months because the first payment is due in April to coincide with the federal tax-filing deadline and the last payment is due after the end of the year.
Quarterly tax payments are due on the following dates (or on the next day after a weekend or holiday):
“Estimated tax payments should be made as the money is earned,” Chelsea Monk, enrolled agent and client manager with Hamilton Tax and Accounting in Grayslake, Illinois, says.
“If you have a rockstar third quarter, you’ll need to make sure your September estimate reflects that, rather than waiting for the fourth quarter to catch it all up,” she adds.
How Much to Pay in Quarterly Taxes
If you have income that isn’t subject to withholding or if the withholding is too low to cover your tax liability, you can pay quarterly estimated taxes. The amount doesn’t need to be precise — hence the name “estimated tax” — but you’ll want to pay enough to try to avoid an underpayment penalty.
You can usually avoid the underpayment penalty if you owe less than $1,000 in tax after subtracting your withholding and refundable credits. You can also avoid it if you paid at least 90% of the taxes you owe for the current year or 100% of the taxes you owed for the prior year — or, 110% of those taxes if your adjusted gross income was $150,000 or more (whichever is less) through withholding and estimated taxes.
You can complete the worksheet in IRS Publication 505 to help calculate the amount, or you can get help from IRS’s Interactive Tax Assistant by asking “Am I required to make estimated tax payments for 2023?” You’ll need to have information available from your previous year’s tax return.
If you have self-employment income, keep in mind that your tax liability also includes self-employment tax. These are Social Security and Medicare taxes (also known as FICA taxes), which total 15.3% on your income up to a certain level — in 2023, you pay Social Security tax of 12.4% on up to $160,200 of net earnings and 2.9% Medicare tax on your entire net earnings.
Those who are employees have to pay only half the amount (7.65%) because their employers pay the other half. Self-employed people, however, have to pay the full amount since they are both the employer and employee, although they can deduct half of their self-employment tax on Form 1040.
How to Make Quarterly Tax Payments
You can pay quarterly estimated taxes by filling out the voucher in the IRS Form 1040-ES publication and mailing it with a check to the IRS address listed in your state. Or, you can make quarterly payments online — visit the IRS Make a Payment page for options.
Also, find out whether you need to pay quarterly income taxes to your state by checking with your state department of revenue.
“Most states with an income tax expect taxes to be prepaid in a similar way to federal rules,” Foss says.
Paying Quarterly Taxes vs. Increasing Tax Withholding
You may have other ways to avoid underpayment penalties without paying estimated taxes.
If you or your spouse have income from another job and have taxes withheld, you can have more money withheld from your pay as an employee to help cover the extra income.
Or, you may be able to have taxes withheld from other types of income, such as IRA withdrawals, unemployment benefits or Social Security payments.
Increasing withholding not only spreads out your payments, it may also do a better job of helping you avoid a penalty.
“Penalties imposed on a shortfall of tax prepayments are calculated on a quarterly basis,” Foss says.
“Withholding taxes, though, are treated as if they went to the IRS ratably during the year, so an IRA withdrawal on Sept. 15 with federal taxes withheld would be treated as if the tax had been paid in a little bit each day of the year. It’s easy to reduce or eliminate tax penalties if one uses withholding instead of estimated tax payments,” she adds.
To adjust your withholding from your paychecks, submit a new Form W-4 to your employer requesting to have more money withheld for taxes each pay period. You don’t need to explain to the employer why you want the tax payments increased, Foss says.
If you are receiving unemployment benefits, you can ask to have taxes withheld from your payments when you apply for benefits, or you can file IRS Form W-4V with your unemployment office. You can request only that 10% of each payment be withheld from your unemployment benefits for federal income taxes. You can also use that form to request withholding from Social Security benefits.
You can also request to have more money withheld for taxes when you take IRA withdrawals. Withholding from IRA withdrawals is voluntary but if you decide to elect federal withholding from them the minimum rate is 10%.
“There is no maximum rate, so people who are both self-employed and making IRA withdrawals could try to pay all of their taxes using tax withholding from retirement distributions,” Foss says.
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