Tax glossary

Estimated Taxes

Estimated Taxes — what it means, how it works, and a real example, explained without the jargon.

What is Estimated Taxes?

Estimated taxes are quarterly payments you make directly to the IRS on income that has no withholding — freelance profit, business income, investment gains.

How it works

You project your year's tax, divide it into four, and pay via Form 1040-ES by mid-April, mid-June, mid-September, and mid-January. It's the self-employed version of a paycheck's withholding, and skipping it invites an underpayment penalty.

A quick example

A consultant expecting $20,000 of total tax pays about $5,000 each quarter. Miss a payment and the IRS charges interest-style penalties on the shortfall, even if you settle up in April.

What people get wrong

The easiest safe harbor: pay 100% of last year's tax (110% if you're a higher earner) across your four payments. Hit that and you avoid penalties no matter how much you actually end up owing.

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Frequently asked questions

What does Estimated Taxes mean?

Estimated taxes are quarterly payments you make directly to the IRS on income that has no withholding — freelance profit, business income, investment gains.

How does Estimated Taxes work?

You project your year's tax, divide it into four, and pay via Form 1040-ES by mid-April, mid-June, mid-September, and mid-January. It's the self-employed version of a paycheck's withholding, and skipping it invites an underpayment penalty.

What's the most common mistake with estimated taxes?

The easiest safe harbor: pay 100% of last year's tax (110% if you're a higher earner) across your four payments. Hit that and you avoid penalties no matter how much you actually end up owing.