Withholding and Quarterly Estimated Taxes

The federal tax system expects you to pay as you earn, not in one lump in April. Employees do this through withholding without thinking about it. Anyone with income that has no tax taken out, such as freelance work, a side business, investment gains or rental income, has to pay during the year themselves, or face a penalty on top of the tax. This chapter explains who must pay estimated tax, the safe harbor rules that protect you from the penalty, how to use withholding instead, and a simple quarterly routine. Dates and amounts are for the 2026 tax year.

Who has to pay during the year

You generally need to make estimated payments if you expect to owe at least $1,000 for the year after subtracting withholding and refundable credits. That catches most people with meaningful self-employment income, and many with large investment income or a big one-time gain.

For income earned in 2026, payments are due on four dates:

The periods are not equal quarters, which catches many people out: the second payment comes only two months after the first. When a date falls on a weekend or holiday, the deadline moves to the next business day. Most states with an income tax have their own estimated payments on similar dates.

The safe harbors

The penalty is avoided if your withholding and estimated payments, paid on time, reach the smaller of:

• 90% of this year's tax, or
• 100% of last year's tax, as shown on last year's return. If last year's adjusted gross income was more than $150,000, this becomes 110%.

The tax in these rules is your total tax, which includes self-employment tax. To keep the example simple, the figures below show federal income tax only.

Suppose someone's income tax last year was $5,020, and this year their income grows to $70,000, so the tax will be about $6,570. They have two ways to be safe. They can pay 90% of $6,570, which depends on an estimate of income that may turn out wrong. Or they can pay at least $5,020, last year's tax, in four equal installments. The second target is known on January 1 and cannot be missed by a surprise good year. Whatever remains is due by the April filing deadline, with no penalty.

That is why the prior-year rule is the most popular safe harbor for people whose income is rising. When income falls, the 90% rule may require less.

Income that arrives unevenly, such as a large gain in December or a seasonal business, can make equal installments look unfair. The annualized income installment method on Form 2210 lets you match payments to when the income was actually earned, at the cost of more paperwork.

Withholding is the flexible alternative

Withholding has one big advantage over estimated payments: the IRS treats it as paid evenly through the year, no matter when it was actually taken out. Extra withholding from your December paycheck counts as if a quarter of it had been paid on each due date. An estimated payment made late, by contrast, is late.

So if you have a job as well as other income, you can often skip quarterly payments entirely:

• On your Form W-4, enter an extra amount to withhold from each paycheck in Step 4(c).
• If you and your spouse both work, or you have two jobs, complete Step 2 so that enough is withheld for your combined income.
• Use the IRS Tax Withholding Estimator, listed in this chapter's sources, to find the amount, and check it again mid-year.

Bonuses deserve a look. Employers often withhold a flat 22% from them, which is too little for someone in the 24% bracket or above, so a large bonus can leave a balance due in April.

What the penalty costs

The underpayment penalty works like interest. It is charged on each installment's shortfall, for the number of days it was late, at the IRS underpayment rate: the federal short-term interest rate plus three percentage points, reset each quarter. It is not ruinous, but it is a cost with nothing in return, and it is easy to avoid with the rules above.

A large refund is the opposite mistake. It means you lent the government money all year at no interest. The aim is to pay roughly what you owe, and to finish the year with a small refund or a small balance due.

A quarterly routine

1. Set aside as you earn. Move a fixed share of every payment you receive into a separate savings account for tax. Chapter 5 explains how to choose the share.
2. Pick a target in January. Use 100% (or 110%) of last year's total tax as the floor, divided into four installments, and note the four due dates.
3. Pay online. IRS Direct Pay, your IRS online account or the Electronic Federal Tax Payment System all let you schedule payments and keep a record. Choose estimated tax and the right year.
4. Check after each quarter. If income is running well above last year's, the prior-year safe harbor still protects you from the penalty, but put extra aside for the balance due in April.
5. Remember your state. Pay state estimates on its schedule too.

The most expensive mistakes are forgetting self-employment tax when estimating, waiting to pay everything at the end of the year, missing the January payment, and using 100% of last year's tax when the 110% rule applies.