What is Estimated Tax?
- Anthony J. Charles, EA
- Mar 16
- 18 min read
Updated: Apr 14
The income tax is a pay-as-you-go system. A common misconception is that income tax is due April 15th. If you were to pay your tax for the previous year on April 15th, then you would be subjecting yourself to an estimated tax penalty. There are two ways to pay income tax: (1) through withholding and (2) estimated tax payments. W-2 employees pay their taxes via withholding from their wages, which is withheld by their employer every time payroll is run. Employees never see this money, which gives rise to notion that taxes are due on April 15th. It also results in a view that tax season is all about refunds. Since it’s money you never saw, it can feel like a big payday, even though it simply means you had too much of your wages withheld. You gave the government an interest free loan, instead of keeping it and growing it yourself. Or the more believable scenario, you keep the money and use it to buy unnecessary stuff. Investing is always better than consuming – now I’ll get off my soapbox.
Estimated tax is not a separate type of tax; it’s simply a method of paying your regular income tax. It refers to two things: (1) the pre-payments of income tax before the due date of your return, and (2) the tax obligation itself, which may require you to make quarterly payments, the failure of which results in an estimated tax penalty. When people say, “I have to pay my estimated tax,” they are referring to the required tax payments they must make each quarter to cover their accrued income tax liability, especially if they don't have enough tax withheld from their income.
For self-employed taxpayers, April 15th is a dreadful day if you do not make any estimated tax payments. The failure to plan for and pay estimated taxes is the number one reason taxpayers get behind with the IRS. Estimated taxes are due quarterly… well, approximately quarterly. Q2 consists of income from the last half of April, May, and first half of June (2 months) and Q4 covers the last half of September through the first half of next January (4 months). Do not confuse calendar quarters with quarterly estimated tax deadlines. Amending the estimated tax due dates to reflect true quarterly intervals would be a legislative achievement that many affected taxpayers would celebrate.
You can think of the four estimated tax installments as buckets of money that you are required to fill up by their respective deadlines or face a penalty. The deadlines are April 15th, June 15th, September 15th, and January 15th. How do you know how big the buckets are that need to be filled? I am glad you asked, because the IRS has two methods to determine the size of your buckets. Before I show you what the safe harbor details are, we need to discuss who is generally exempt from the estimated tax penalty. A taxpayer who owes less than $1,000 is exempt from the estimated tax penalty. If you owe $1,000 or more, you must choose between the lesser of two safe harbor methods.
Pay 100% of the tax shown on last year’s return (If your AGI was over $150,000 last year, then pay 110% of the tax shown on last year’s return.), or
Pay 90% of the tax that will be shown on your current year’s return. Since taxpayers don’t know what their future income will be, that’s where the term “estimated” tax comes from. It’s literally an educated guess.
There’s some IRS-speak we need to clarify. When I say the “tax shown on your return,” it means the total tax minus the total refundable credits. If you go by the first method and the tax shown on your 2024 return was $10,000, then you would need to pay $10,000 in estimated tax for 2025 in four quarterly installments of $2,500 each. If you made more than $150,000 in AGI (or $75,000 if married filing separately) on your 2024 return, then you would need to pay $11,000 in estimated tax for 2025 in four quarterly installments of $2,750 each.
With the second method, if you think your 2025 tax bill is going to be $10,000, then you need to pay $9,000 in estimated tax during 2025 in four equal installments of $2,250. The second method is to keep things fair for taxpayers whose incomes have fallen compared to the previous year. Here’s another trick, you can skip the Q4 estimated tax payment if you file your tax return and pay the entire balance due by February 2nd. Farmers and fishermen also have special rules when it comes to estimated tax.
Regardless of whether your income rises or falls, if you pay enough in estimated tax based on just one of the safe harbor methods, you will not pay an estimated tax penalty. If you don’t meet either of those methods, and you owe less than $1,000 at tax time, then you will not pay an estimated tax penalty. So how does one calculate the amount of penalty one may be subject to? The answer is based off the amount of underpayment after the due dates for each quarterly installment, the period of time that the underpayment remains underpaid, and a quarterly published interest rate for underpayments. That interest rate is calculated by taking the federal short-term interest rate and adding three percentage points. For Q1 of 2025, the federal short-term rate was 4%. Four plus three equals 7%. So, the underpayments are charged a 7% interest rate penalty during that specific calendar quarter. The IRS also will charge you interest on penalties until the balance is paid in full. Ouch!
You can combine withholding and estimated tax payments to fill your buckets in any proportion you wish. Withholding has a special ability when it comes to paying your taxes. Withholding is deemed to be paid equally between all four quarters on each estimated tax due date. That means $4 of withholding is treated as paying $1 each quarter on all four estimated tax due dates. That means that withholding can pay for past and future installments. This time traveling aspect of withholding can allow a taxpayer to go back in time to satisfy an underpayment on earlier installments. Expert tax accountants have a little trick up their sleeves that can minimize a taxpayer’s estimated tax penalties by requesting withholding on specific types of income that derive from Form 1099-R, if it is done within the tax year to which the underpayment(s) apply.
While withholding is deemed to be spread equally throughout the tax year, estimated tax payments are applied first to the oldest bucket that hasn’t been filled. Meaning, you cannot pay estimated taxes for Q2 unless the Q1 bucket has been filled. Consequently, you cannot apply an estimated tax payment to the Q4 bucket unless all the buckets for Q1, Q2, and Q3 were already filled. This can result in larger estimated tax penalties even though interest rates are going down throughout the year.
As an example, let’s say you make an estimated tax payment of $1,250 on December 10, 2025. Each bucket needs to be filled with $500 each quarter, and this is the first estimated tax payment that the taxpayer has paid. Assume no withholding. First, the IRS will look at the Q1 bucket, which has $0 out of $500 in it. $500 of the $1,250 estimated tax payment will be used to fill the Q1 bucket. When the Q1 bucket is filled with its required $500 installment, then the IRS will look to the Q2 bucket. The remaining estimated tax payment has been decreased to $750. For the Q2 bucket, it will be filled with $500, leaving $250 of estimated tax payment left to be allocated. The $250 will then go into the Q3 bucket. Overpayments of estimated tax automatically get carried over to the next bucket. All estimated tax penalties for Q1 and Q2 will end on December 10, 2025. Because Q3 still has a remaining underpayment of $250 ($500 - $250), the estimated tax penalty will continue to accrue on the empty space in Q3’s bucket until it’s paid. On January 16, 2026, the penalties will begin to accrue on the Q4 bucket.
The last opportunity to make a payment for your income tax liability is when you file your extension for your individual income tax return. The IRS recommends that you make an “extension payment” which is treated as “other payments and refundable credits” on Schedule 3 (Form 1040), Part II. It is applied on April 15th, so it won’t have the ability to offset any underpayments of estimated tax, since calculations for estimated tax penalties stop on April 15th. Any amount owed after April 15th will get hit with failure-to-pay penalties and interest. More on the extension payment later.
How to Make Estimated Tax Payments
The first opportunity to make an estimated tax payment is upon the filing of your tax return. Any overpayment can be elected to be applied to your estimated tax payment for the next tax year, or it may be refunded to the taxpayer. The cool thing about this strategy is that it does not matter when you file your tax return: early, on time, or even late. The estimated tax payment is deemed to be made on April 15 of the next tax year (for 2024 tax returns, it is deemed to be paid on April 15, 2025). This is one of the ways that you can go back in time and erase an estimated tax penalty. If your overpaid taxes completely fills up the Q1 bucket, then it will automatically move on to the next bucket until completely used up. The downside to this strategy is that taxpayers who are required to make estimated tax payments and fail to do so usually do not have an overpayment on their tax returns. They usually have a balance due.
The traditional way to make an estimated tax payment is by mailing a check or money order to the IRS. When you do so, the payment is deemed to be made on the postmark date, which is the date the post office marks your envelope with the date. So, if you are near or after the installment due date, ask the postal clerk to postmark your envelope. Now, the IRS is a big bureaucratic institution that is good at following processes, but it’s horrible at reading minds. Therefore, two protective processes have been set up for dealing with estimated tax payments that were snail mailed.
The first process is to use a payment voucher. The IRS has many different types of payment vouchers for different kinds of taxes. For estimated taxes, the payment voucher is called Form 1040-ES, Estimated Taxes for Individuals. The form asks for your name, SSN, address, and the amount of the payment you are including. Each tax year’s Form 1040-ES comes with four vouchers: one for each quarterly installment. Cut out the voucher for the quarter you want the estimated tax payment to be for. This voucher lets the IRS know who, what, when, and how the estimated tax payment is to be applied. Sometimes the payment voucher can get separated from the check or money order. The second process is designed to deal with that contingency.
The second process is for you to write in the memo line what the check or money order is to be applied to. Most checks have your name, address, and amount of payment written on them. What you need to do is write in the memo line the tax year for which the payment pertains, the form it accompanies (in this case it’s Form 1040-ES), your SSN, and the quarter for which the payment should be applied. An example would be: “123-45-6789 --- 2025 Form 1040-ES, Q3.” Now the IRS knows which taxpayer’s account the check is for, that it applies to tax year 2025, the type of tax is estimated income tax for individuals, and that it should be applied to the third quarterly installment.
No matter which quarterly voucher you use, and no matter which date you make the payment, the IRS’s rules for applying estimated tax payments will kick in. The oldest underpaid installment gets paid first. When you make an estimated tax payment, regardless of how you did it, you need to keep track of the amount of the payment and the date is was paid/postmarked. Your accountant will use that information to calculate any estimated tax penalties using Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. The accountant can also take advantage of the annualized income installment method for figuring out your estimated tax penalty. This method is useful for taxpayers whose income is variable throughout the year, such as seasonal businesses. For example, a business that sells Christmas trees will get penalized less for failing to make estimated tax payments for Q1, Q2, and Q3 when most of the business income comes from Q4. Therefore, hopefully the Christmas tree shoppe made a big estimated tax payment for Q4 before its due date of January 15.
For the technologically savvy taxpayer, making estimated tax payments via the internet is the easiest and most common method. The IRS has an app for smartphones called IRS2Go. If you are required to make estimated tax payments, I recommend downloading this app. You can check on the status of your tax refunds or use the app to make tax payments. You will be given two choices for estimated taxes. IRS Direct Pay will take money directly from your bank account using an ACH transfer. You can also use a debit card, credit card, or digital wallet. I recommend not making payments using cards because they increase your effective tax rate by charging card fees and interest. Never make income tax payments using a credit card unless you are sure you will pay the loan balance before it gets hit with an interest charge.
For those who are not fans of smart phones, you can use a computer to connect to www.irs.gov/payments. In addition to the two methods mentioned in the previous paragraph, the IRS also allows you to make payments using the Electronic Federal Tax Payment System (EFTPS), which is how businesses pay their payroll tax. It requires you to enroll your bank account and has a few layers of security measures that makes it difficult for a typical taxpayer to use the EFTPS system. Leave that method to your accountant.
The IRS also allows you to pay taxes via same-day wire transfer. For that, you need to go to your bank and provide them a Same-Day Wire Transfer Worksheet that you can download off the IRS’s website. Your bank may charge you fees for this method. I do not recommend this as a first-line method unless you are a medium-to-large business or are a wealthy individual with access to private banking products.
There is also the Electronic Funds Withdrawal (EFW) method that only tax professionals have access to. You can set up estimated tax payments to auto-pay directly from your bank account on specified days. The downside is that it must be done through professional tax software, when you e-file a tax return, and it is difficult to cancel a payment that has already been scheduled. I use EFW with clients who have a balance due and want to pay part of it, or all of it, when they file their tax returns. If you want your tax professional to help you with estimated tax payments, then I would use my access to EFTPS, not EFW.
For those of you who are old school and want to pay via cash, currency, or coins. This is useful for taxpayers that do not have access to banking for whatever reason. First you need to obtain a document with a barcode after enrolling in an online account with ACI Payments, Inc (www.officialpayments.com) or Pay1040 (www.pay1040.com). Then you will take your cash and barcode to certain retail stores such as Dollar General, CVS, Walgreens, 7-Eleven, Walmart, etc. Mind you, these retail stores impose transaction limits on cash paying taxpayers. There is a $500 to $1,000 per transaction limit depending on the retail store, and there appears to be a limit on the number of transactions per year. This method is designed to be cumbersome in order to encourage people to pay electronically with money that’s in a bank. You will likely be encouraged to buy a prepaid debit card and pay online instead of cash.
There is also an option of paying your taxes at an IRS Taxpayer Assistance Center (TAC), but you must make an appointment 60-90 days beforehand so the TAC can ensure they have enough staff and a special courier to being the cash to the US Treasury. When you make the appointment, you will need to provide the exact details of the cash transaction, down to the level of detail of letting the TAC know the exact quantity and denominations of the US currency that you will be bringing to the appointment. Make sure you have exact change, down to the penny. There does not appear to be a limit on the amount of cash per transaction at TACs. Expect TAC personnel to suggest easier ways of paying your taxes. For better or worse, we are evolving into a cashless economy.
To summarize, lets provide a scenario for a single taxpayer and his 2025 estimated tax requirements. We will also calculate some estimated tax penalties for him. His 2024 AGI was $178,501 (which is important for determining the safe harbor percentage for 2025).
Step 1: Determine Required Estimated Tax Payments
The taxpayer's total tax for 2024 is $23,500. The required installment payments for 2025 depend on the taxpayer's 2024 tax liability, because under IRS rules, the required payments are typically based on the previous year's tax liability. We do not know how much taxes our hypothetical taxpayer will be liable for in 2025, so we are using the previous year’s tax method.
Required installment payment for each quarter:
The taxpayer needs to make estimated tax payments based on 110% of their previous year’s tax liability (to avoid penalties for underpayment).
110% of 2024 tax liability: $23,500 × 1.10 = $25,850
Thus, the taxpayer is required to make $25,850 in estimated tax payments for 2025. However, let’s assume that the taxpayer will have $7,575 in withholding for 2025. This amount will be considered as part of their total required payments for 2025.
Required estimated tax payments after adjusting for withholding:
$25,850 (total required payments) – $7,575 (withholding) = $18,275. The remaining $18,275 must be paid evenly through quarterly estimated tax payments.
Quarterly estimated tax payments: $18,275 ÷ 4 = $4,569 per quarter
Thus, the taxpayer's required quarterly installment is $4,569. He needs to fill up each bucket with $4,569 of money on or before each bucket’s due date. Those estimated tax payments will “sit on top” of the withholding amounts that “sink to the bottom of the bucket.”
Step 2: Underpayment for Each Quarter
The taxpayer does not make any other estimated tax payments until after the Q4 due date. In this case, there will be quarterly installments that are underpaid. Let's calculate the underpayments for each quarter:
Q1 due April 15, 2025:
The taxpayer is required to have paid $4,569 by the end of Q1’s installment due date of April 15, 2025. However, the taxpayer had an overpayment of $1,298 from 2024 that he elected to be used as an estimated tax payment for next year. Thus, $4,569 - $1,298 = $3,271 is the remaining amount of empty space in the Q1 bucket on April 15, 2025.
Underpayment for Q1 = $3,271
Q2 due June 15, 2025:
By the end of Q2, the taxpayer would still owe $4,569 for Q2, but no estimated payments were made. So, the underpayment for Q2 is also the full amount:
Underpayment for Q2 = $4,569
Q3 due September 15, 2025:
By the end of Q3, the taxpayer would have $4,569 due, but again, no estimated payments were made. The underpayment for Q3 is:
Underpayment for Q3 = $4,569
Q4 due January 15, 2026:
By the end of Q4, the taxpayer would have $4,569 due, with no payments made. So, the underpayment for Q4 is:
Underpayment for Q4 = $4,569
Step 3: Estimated Tax Payment Applied
On January 30, 2026, our taxpayer realized that he was going to owe a large amount of income taxes for tax year 2025. So, he made a $4,000 estimated tax payment. That payment will be applied to the oldest unfilled bucket, which is Q1.
Q1 ended with an underpayment of $3,271. When the taxpayer makes his $4,000 estimated tax payment, $3,271 of it fills up the remaining space in the Q1 bucket. The estimated tax penalties for Q1 stop accruing on the date of the payment: January 30, 2026.
The remaining amount of his late payment $4,000 - $3,271 = $729 then spills over into the Q2 bucket, leaving an underpayment of $4,569 - $729 = $3,840. The Q2 underpayment penalty accrued on $4,569 until January 30, 2026. Afterwords, it was only accruing on the remaining underpayment of $3,840.
Q3 and Q4 still have underpayments of $4,569 each since no estimated taxes were paid into those buckets. They will continue to accrue their estimated tax penalties until April 15, 2026.
Step 4: Calculating the Estimated Tax Penalty
The IRS charges penalties based on the amount of underpayment, the time the underpayments exist, and the interest rate for that quarter. The interest rates vary depending on the quarter. We will use the following interest rates for 2025:
Q1, Q2, Q3 interest rate = 8%
Q4 interest rate = 7%
We will calculate the penalty for each quarter during each rate period separately, then sum them all up. See the penalty worksheet in the Instructions for Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts. I used the 2024 version of the penalty worksheet to illustrate how the estimated tax penalty is manually calculated based on calculations performed on Form 2210 Parts I and III.
Step 4: Total Estimated Tax Penalty
Now, we sum up the penalties calculated on our penalty worksheet and got $773.93. Therefore, our hypothetical taxpayer will have an estimated tax penalty of $774 added to his tax bill. If the taxpayer made significantly less than last year, then he will not be charged an estimated tax penalty if his total withholdings plus his $5,298 in estimated taxes are at least 90% of his total tax shown on his 2025 return. IRS computers and professional tax software can calculate whether a penalty is even necessary, and if it is, then how much, in a couple seconds.
To see the manual calculations on the IRS Worksheet for calculating the estimated tax penalty, open the pdf file below.
Lesson learned: pay your estimated tax obligations on time and keep track of the dates and amounts paid. Increasing your withholding can lessen or eliminate your estimated tax payment obligations. The most important part of this is to get in the habit of making quarterly tax payments, even if you only pay $1, or $10, or whatever dollar amount you can. Tax compliance is mostly behavior and habit.
State Estimated Tax Obligations
Don’t forget about your state’s estimated tax obligations. Some have their own rules and due dates. Many state taxation authorities are much more aggressive and swifter than the IRS. Let’s use Hawaii as our example, since Hawaii is one of the most burdensome states when it comes to taxes, second only to California.
First, Hawaii’s estimated tax due dates are on the 20th day of the same months as federal.
Q1 due April 20th
Q2 due June 20th
Q3 due September 20th
Q4 due January 20th of following year
The 20th day also applies to the individual income tax return and balance due date in April, and the monthly, quarterly, or semiannually general excise tax (GET) returns. You can also contribute an overpayment of individual income tax towards the following year’s Q1 estimated tax installment. Hawaii’s safe harbor regulations for estimated tax conform with the federal regulations. Hawaii uses one form for payment vouchers: Form N-200V, Individual Income Tax Payment Voucher. With it, you can make payments for estimated tax, extension payments, and balance due payments. If you send a check or money order, ensure that your name and SSN are written on it. Also make sure to write what the payment is for. Example: “2025 Form N-15 Estimated Tax Q1”
You can also make estimated tax payments via ACH transfer by going to Hawaii Tax Online at https://hitax.hawaii.gov When you reach the homepage, go to the Payment category and click on “Make a Payment.” The tax account type for which you would like to pay is “Individual Income” and the type of payment is “Estimated Tax Payment.” Then just type in the rest of the details requested. Make sure you save the receipt. You need to know the date of payment and the amount of payment for when you file your tax return. There is no use in making estimated tax payments if you don’t apply them to your tax return! If you are the type of taxpayer that is required to make estimated tax payments, then I suggest you get your own dedicated bank account for the purpose of sequestering the funds away from your normal day-to-day checking account. It is way too easy to spend your tax money if it’s in your regular spending account.
The Extension Payment
For both federal and most states, the government gives you an opportunity to make a payment with your request for a filing extension. The reason for this is because the extension is only for the actual filing of your tax return. It is not an extension of time to pay your tax. If you made estimated tax payments through the year as you should have, it may cover all your taxes owed for the year. In some instances, especially for years with large increases in income, the estimated tax payments might be insufficient to cover 100% of your tax liability. Remember, you only need to pay 90% of your entire tax liability via quarterly estimated tax payments to not be assessed an estimated tax penalty. You will still owe the remaining 10% by the original due date of your tax return. The “extension payment” is designed for that remaining amount that was not paid via estimated tax payments.
The tricky part is that you need to prepare a draft of your tax return to determine how much, if any, you need to pay for your extension payment. The way it works is you input all your income and calculate an amount of tax due. Then you add up all your payments, which consist of withholding, estimated tax payments, extension payments, and refundable credits. If your payments were not enough to cover all your tax, then you have a balance due. Balances remaining after the due date are then subject to failure-to-pay penalties and interest. If your payments exceed your taxes owed, then you have an overpayment. You can either elect to apply any overpayment to next year’s estimated tax or receive it back as a refund. For most taxpayers, the only reason to extend filing is to gather information for deductions. You should already know what income you received. Base your extension payment off that. Be conservative with estimating deductions and credits because the penalties and interest on a balance due will exceed (by design) whatever time-value you would lose with an overpayment. An extension payment is generally considered a payment of estimated tax for the purposes of calculating underpayment penalties, but do not treat it as your Q4 payment because Q4 is due in January. Extensions are ideally filed in March. So yes, you really should have your tax return at least partially prepared before you file an extension. I know it sounds weird, but income taxes are paid before you get the bill.
Extension payments are the last chance that you get to avoid a balance past due. You should be willing to accept that if your extension payment is not enough, you will be assessed penalties and interest. It does not mean you should put your head in the sand and not pay anything. Quite the contrary, you should put as much money into an extension payment as you can to avoid penalties and interest. It’s a classic cost-benefit decision. It’s also a reminder not to abuse filing extensions because you would rather procrastinate. Extensions are meant for taxpayers who are waiting on a late tax form such as a Schedule K-1, a correction to their Form W-2, or taxpayers who do not have all the information (deductions) that they need to file their tax return, including taxpayers who have any sort of personal problem that prevents on-time filing. Use your extension wisely. Don’t make your taxes more expensive than they need to be.
