Estimated tax payments are periodic payments made by taxpayers who do not have taxes automatically withheld from their income, such as self-employed individuals, freelancers, or investors. These payments ensure that the taxpayer’s tax liability is paid throughout the year, helping avoid underpayment penalties when the annual return is filed.
Taxpayers who earn income from sources such as:
- Self-employment.
- Interest.
- Dividends.
- Rentals.
must typically make estimated payments if they expect to owe at least $1,000 in taxes for the year.
The IRS requires estimated payments to be made quarterly, using Form 1040-ES or the Electronic Federal Tax Payment System (EFTPS). If the taxpayer underpays their estimated taxes, they may be subject to a penalty for underpayment.
Properly calculating and making estimated tax payments ensures that the taxpayer remains compliant with IRS rules and avoids significant tax bills at the end of the year.