Estimated Tax Payments: What They Are – and What They Aren’t
If you’ve ever received advice to make estimated tax payments and thought, “Why am I paying next year’s taxes already?” – you’re not alone. The confusion is understandable, especially when you're juggling a busy schedule and trying to stay on top of your finances. This blog discusses what estimated tax payments really are – and what they’re not.
What Are Estimated Tax Payments?
Estimated tax payments are a way to pay your income tax gradually throughout the year, rather than in one lump sum when you file your return. These payments apply to the income you’re earning now, during the current tax year—not income you’ll earn in the future.
This might feel confusing, because you don’t file your tax return until the following year; you may feel like you’re paying early for next year’s taxes. But that’s not the case. The IRS uses a “pay-as-you-earn” system, which means you’re expected to pay taxes on your income as you accrue it. Estimated payments help you do just that.
They’re typically required for people who:
Are self-employed or run a small business
Have significant investment income (stocks, dividends, etc.)
Work a job, but don’t have enough taxes withheld from their paycheck
Receive income from rentals, partnerships, or other non-wage sources
If you fall into any of those categories, the IRS expects you to pay as you go – just as taxes are automatically withheld from W-2 employees' paychecks.
Estimated Payments vs. Withholdings: What's the Difference?
Estimated tax payments and withholdings are both ways to pay your taxes throughout the year.
Withholdings happen automatically. If you're a W-2 employee, your employer withholds a portion of your paycheck and sends it directly to the IRS on your behalf.
Estimated payments are made manually. You, the taxpayer, calculate and submit these payments on a quarterly basis if your income isn't subject to regular withholding, like freelance work or investment income.
In short, withholdings are taken out for you, while estimated payments are up to you to manage. But both are meant to keep your taxes current with your earnings.
What Happens If You Don’t Pay?
Skipping estimated payments or underpaying can result in a significant bill at tax time, including interest and penalties. Even if you plan to pay in full when you file, the IRS still expects those quarterly payments throughout the year.
How Do I Know How Much to Pay?
Your estimated payments are typically calculated using either last year’s tax return, or a projection of your current year’s income.
Whichever method is used, we’ll walk you through the numbers and help you make timely payments. The goal is to avoid surprises – and penalties – while keeping payments manageable.
Bottom Line:
Estimated tax payments are part of a system designed to keep your taxes current with your earnings, not a prepayment for the future year. Understanding how they work can help you avoid confusion, comply with tax laws, and feel more in control of your financial picture.
Still have questions? That’s what we’re here for. Don’t hesitate to reach out – we’re always happy to help you stay on top of your tax obligations.