Estimated Tax Payments

What it means

Most employees have taxes taken out of their paycheck automatically by their employer, which is called withholding. When you earn extra money from stock sales or company awards, your employer might not withhold enough tax to cover what you owe the government.

Estimated tax payments are how you pay the IRS and your state during the year. These payments are due on April 15, June 15, September 15, and January 15 of the next year. If you do not pay enough by these dates, you may face an underpayment penalty (a fine for not paying your taxes on time).

A simple example

Imagine Sam sells some company stock and makes $10,000 in profit. Because his paycheck withholding does not account for this profit, Sam owes $2,000 in extra taxes. To avoid a penalty, Sam sends the IRS $500 before each of the four quarterly deadlines. By doing this, he pays his tax bill on time throughout the year instead of all at once.

Why it matters to you

• Making these payments prevents you from having a massive, surprise tax bill when you file your annual return.
• It helps you avoid the underpayment penalty, which is extra interest charged by the IRS.
• A tax professional can help you calculate if you need to make these payments.

Common mistakes to avoid

• Forgetting to pay by the quarterly deadlines, which can lead to unnecessary fines.
• Underestimating your total income, which means you might not pay enough and will still owe a penalty.

Words used on this page

• Withholding: Tax money taken out of your paycheck automatically by your employer.
• Underpayment penalty: A fine charged by the IRS when you do not pay enough tax throughout the year.