Definition
Estimated tax payments are quarterly payments made by those whose income is not subject to sufficient withholding.
How It Works
Self-employed people, investors, and business owners pay estimated taxes four times a year to cover income tax and self-employment tax. Paying too little triggers an underpayment penalty, even if the balance is settled at filing.
Example
A business owner pays quarterly estimates based on projected income to avoid a penalty at year-end.
Who It Applies To
Self-employed individuals, investors, and business owners with income not fully covered by withholding.
Watch-Outs
Safe-harbor rules let you avoid penalties by paying a set percentage of the prior year's tax, which is often the simplest protection for high earners with variable income.
