Should You Be Making Quarterly Tax Payments?

Quarterly taxes are estimated payments made on a quarterly basis to the U.S. Internal Revenue Service for income that is not subject to withholding. As the U.S. workforce is increasingly engaged in freelancing, side gigs and self-employment, quarterly payments are a reality more taxpayers may soon be facing.

The group of Americans who are self employed has grown since 2020: More than 10 million people in the U.S. were self-employed in September 2021, according to the U.S. Bureau of Labor Statistics, up from about 9.5 million in September 2020.

These self-employed individuals are usually required to make quarterly payments, but some workers receiving salaried W-2 income may still need to make quarterly payments under certain circumstances. These payments can help taxpayers avoid an unwelcome surprise on April 15.

"The trend has been that most taxpayers who don't pay enough taxes throughout the year find themselves in a very tight situation at the end of the tax year when they file their tax return. They get into a situation where they cannot pay their back taxes owed," says Alex Oware, certified public accountant at O&G Tax and Accounting Services and tax expert at JustAnswer. "Instead, they can pay their taxes upfront by making quarterly payments."

When Are Quarterly Taxes Due in 2022

Quarterly tax payments are due on the following dates:

Quarterly Taxes Aren't Just for the Self Employed

Individuals who are self employed -- whether sole proprietors, partners, or S corporation shareholders -- typically must make estimated tax payments if they anticipate owing $1,000 or more when their tax return is filed.

But quarterly taxes may also need to be paid in other situations where an individual's withholdings are not sufficient. Estimated payments may need to be sent to cover income from the following sources:

-- Gambling winnings or other prizes.

-- Dividends and interest.

-- Divorce settlements and alimony.

-- IRA distributions.

-- Social Security (if your income is high enough to make benefits taxable).

-- Self-employed or independent contractor 1099 income.

Self-employed people and independent contractors can sometimes avoid making quarterly payments.

"You could be self-employed and still pay yourself a salary. If you pay yourself a salary, you can adjust your withholdings however you like and avoid making quarterly payments," says Deborah F. Graver, certified financial planner and principal at Signature Financial Planning in Pittsburgh. "But people often just aren't sure what they're going to be earning, so paying themselves a paycheck is tough."

[Read: Smart Tax Moves for Freelancers.]

And workers with a W-2 income and a side gig can also avoid making estimated payments quarterly by talking with their employer.

"If you're making a strong side income, you need to be thinking about quarterly payments," Oware says. "If I have a W-2 income and a side gig, I have to decide to ask my employer to increase my W-2 withholding or just pay the estimated taxes on the other side."

How to Estimate Your Quarterly Taxes

Quarterly taxes are used to pay income tax as well as self-employment taxes and alternative minimum taxes, if applicable. To get a rough estimate of your quarterly taxes, Oware says taxpayers can take last year's owed taxes and simply divide by four to estimate this year's quarterly tax payments.

If a small business owner, for example, owed $2,000 after filing last year, he or she could plan to pay roughly $500 each quarter in estimated tax payments this year.

However, last year's income may not be predictive of this year's if your financial situation has changed. To estimate your quarterly taxes most accurately, taxpayers should complete the worksheet included in Form 1040-ES.

Year after year, self-employed taxpayers may be able to better estimate their tax liability by comparing their estimated quarterly payments to the outcome of their annual tax return.

"If you still paid taxes, you might be underestimating," Oware says. "Whenever you get a refund, it means you're giving money to the government interest-free, you may be overestimating."

[Read: 15 Self-Employment Tax Deductions.]

How to Make Quarterly Tax Payments and Avoid Penalties

To make estimated tax payments, complete Form 1040-ES and submit your payment online, by phone or by mail.

The penalty for failing to pay enough tax throughout the year includes the tax owed plus interest. Taxpayers can avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or by paying either at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, according to the IRS website.