So many people – especially newly divorced single moms and first-time freelancers – end up in tax trouble for one common reason: They don’t realize they need to make estimated tax payments.
So if you:
- Started a business
- Have a side gig
- Got unemployment
- Work from home as a freelancer
- Have any 1099-NEC or 1099-MISC income
- Have investment income
- Take money out of a retirement account…
You could get a nasty surprise at tax time, unless you do something proactive to prevent it…
Make quarterly estimated tax payments during the year.
What kind of income would be on the 1099-NEC or 1099-MISC?
Any time someone pays you at least $600 during the year, you should receive either form 1099-NEC or 1099-MISC. 1099-NEC is for “non-employee compensation,” and covers most freelancing, consulting, and side gig income. 1099-MISC covers “other” – miscellaneous – types of income, such as royalties, rents, and prizes.
What are estimated tax payments?
When you have a regular job with a regular paycheck, they take out taxes – a lot of taxes, including:
- Federal income tax
- Social Security tax
- Medicare tax
But if your income comes from other taxable sources like freelancing or unemployment, no one is managing those taxes for you, so they’re going unpaid. The IRS doesn’t like that, and they’ll charge interest and penalties on the unpaid taxes at the end of the year… unless you make estimated tax payments.
Every quarter, you’ll send a payment into the IRS for around 25% of your expected year-end tax bill. And we’ll talk about how to figure out how much to pay in just a minute… because it’s important to come up with a good estimate.
If you blow off those quarterly payments or don’t pay enough, you’ll end up with a huge tax bill at tax time. And it will be even bigger once the IRS slams you with interest and penalties. In fact, the IRS will charge extra fees kick in if you’re even one day late. So set a reminder, put it on the calendar, whatever you have to do to make sure those quarterly estimated tax payments get sent in on time.
Estimated Tax Payment Due Dates
| Payment 1 | April 15 |
| Payment 2 | June 15 |
| Payment 3 | September 15 |
| Payment 4 | January 15 |
When the 15th falls on a weekend or holiday, your estimated tax payment is due on the next business day.
Important: If you are late with your estimated tax payment, don’t wait until the next payment date. Send your late payment as soon as possible to minimize interest charges. The longer you wait, the more it will cost you.
Why a good estimate matters
The IRS is fussy about estimated tax payments, which are required if you’ll have a tax bill of at least $1,000 for the tax year. Not only do they insist you pay on time, they also expect your payment to be “enough.” So even if you make an on-time payment, if they think you underpaid, you could still get hit with penalties and interest (but just on the underpayment amount).
That’s why it’s so important to come up with a good estimate. You don’t want to overpay, and give the IRS more of your money than absolutely necessary. But you also don’t want to underpay, and give them an excuse to pile more on to your tax bill.
How to come up with a good estimate
If you used tax software to do your taxes last year, it probably has an estimated tax input screen where you can enter this year’s numbers. That will help you with all of tax math, but you still have to put in the right information to get realistic estimates. If you didn’t file or do your own taxes last year, you can still figure this out.
To come up with a good estimate on your own, you first have to figure out how much taxable income you expect to get for the whole year. Add up all of your expected income from every possible source. Make sure to include any regular job income (that already has tax taken out) when you’re figuring this out because it might change your tax rate.
Don’t include any money you have coming in that’s NOT taxable, like child support or garage sales. Once you have all that income information pulled together, head over to the IRS Form 1040-ES, which will walk you through the math.