How to Calculate Estimated Taxes: A Guide for Freelancers, Small Business Owners, & More

Who This is For:

Freelancers, solopreneurs, small business owners, and investors who don’t have taxes automatically withheld from their income.

Key Takeaways:

• Estimated tax payments, also known as estimated quarterly tax payments, are how self-employed individuals and those with significant non-wage income pay their taxes quarterly at the federal level.

• You can calculate your payment using last year’s tax liability or by estimating your current year’s income.

• Missing payments or paying too little can result in an underpayment penalty from the IRS.

• Staying organized and using a tax withholding estimator can simplify the process.

• Most taxpayers with only wage income have taxes withheld and do not need to make estimated quarterly tax payments, but those with other income sources must pay quarterly to stay compliant.

For entrepreneurs and investors, tax season isn’t just once a year; you actually need to pay quarterly to meet IRS requirements. If you’re self-employed or receive income without automatic withholding, you’re responsible for making estimated tax payments to the IRS throughout the year. Understanding how to calculate and pay estimated taxes is crucial to avoid a surprise tax bill and potential penalties come April. This blog focuses on requirements at the federal level.

What Are Estimated Tax Payments?

Estimated taxes are the method for paying tax on income that isn’t subject to federal income tax withholding. This includes self-employment income, interest, dividends, alimony, rental income, and capital gains. Instead of an employer withholding tax from each paycheck, you make estimated tax payments directly to the IRS on a quarterly basis.

After-tax income not subject to withholding, such as self-employment income, requires estimated tax payments. In contrast, payroll taxes (such as Social Security and Medicare) are withheld from employee wages by employers.

Who Must Pay Estimated Taxes

If you’re self-employed, a sole proprietor, a partner in a partnership, or an S corporation shareholder, you’ll likely need to make estimated tax payments if you expect to owe more than $1,000 in income tax for the year after subtracting your federal income tax withholding and any refundable credits. This requirement to make estimated tax payments also applies to individuals who receive income not subject to withholding, such as investment income, rental income, or capital gains.

To determine whether you need to pay estimated taxes, review your tax situation early in the year. The IRS Tax Withholding Estimator is a helpful tool for assessing your expected liability and whether your current income tax withholding and credits will cover your tax bill. If you expect to owe, it’s important to make quarterly estimated tax payments throughout the year to avoid penalties. Consulting a professional can also help you evaluate your income sources and ensure you’re meeting all estimated tax obligations, especially if your income fluctuates or you’re new to self-employment.

Federal Income Tax Brackets and Rates

The U.S. federal income tax system uses a progressive structure, meaning your income is taxed at different rates as it increases. For the 2025 tax year, the federal income tax brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Each bracket applies only to the portion of your income that falls within that range, not your entire income. For example, if your taxable income is $50,000 as a single filer, you’ll pay 10% on the first $12,950, 12% on the next $31,575, and 22% on the remaining $5,475.

Income tax brackets for taxable income in 2025

Tax bracket	Single	Married filing jointly	Head of household	Married filing separately
10%	$0–$11,925	$0–$23,850	$0–$17,000	$0–$11,925
12%	$11,925– $48,475	$23,850– $96,950	$17,000– $64,850	$11,925–$48,475
22%	$48,475– $103,350	$96,950– $206,700	$64,850– $103,350	$48,475–$103,350
24%	$103,350– $197,300	$206,700–$394,600	$103,350–$197,300	$103,350– $197,300
32%	$197,300–$250,525	$394,600–$501,050	$197,300–$250,500	$197,300–$250,525
35%	$250,525–$626,350	$501,050–$751,600	$250,500–$626,350	$250,525–$375,800
37%	$626,350+	$751,600+	$626,350+	$375,800+

Understanding which tax bracket you fall into is essential for estimating your liability and planning your estimated tax payments. Knowing your marginal tax rate can also help you make informed decisions about deductions, credits, and other tax strategies throughout the tax year.

Four Methods to Calculate Your Estimated Tax Payments

Method 1: The Safe Harbor Rule (Based on Prior Year's Tax)

This is the most straightforward and safest method to avoid a penalty. You simply pay 100% of your total tax shown on the prior year's return (110% if your adjusted gross income was over $150,000).

Calculation:

• Pull the "total tax" from your last year's Form 1040.

• Divide this number by 4.

• Make estimated tax payments by paying these equal amounts each quarter.

  
  

Example: If your total tax was $20,000 last year, you'd make four quarterly payments of $5,000 each. Even if your income doubles and you owe significantly more at tax time, you'll avoid an underpayment penalty using this safe harbor.

Method 2: The Annualized Income Method

This method is ideal if your income is uneven throughout the year. It allows you to calculate your liability based on the income you’ve actually received to date in each payment period, which can help you avoid overpaying in lean quarters. Using the annualized income method can also help you avoid an estimated tax penalty if your income varies significantly, since it ensures your estimated payments more accurately match your actual earnings.

How it works: You calculate your taxable income, deductions, and credits for each period as if it were the entire year, then figure the tax due for that specific period to make estimated tax payments for each quarter. This requires using IRS Form 2210 and is more complex, but beneficial for seasonal businesses.

Method 3: Estimate Based on Current Year's Tax

If you expect this year’s income to be lower than last year’s, you can estimate your current year’s income tax liability and pay 90% of that amount throughout the year.

Steps:

1. Estimate your total annual income. Be sure to include other income sources, such as interest, dividends, or side jobs, when calculating your expected income for the year.

2. Calculate your expected adjusted gross income.

3. Estimate your deductions and credits (like the Child Tax Credit).

4. Calculate the total tax you expect to owe for the year.

5. Ensure your quarterly payments cover at least 90% of that amount.

Method 4: Using the IRS Tax Withholding Estimator

The IRS offers a free online Tax Withholding Estimator tool. While designed for W-2 employees, it can be adapted by self-employed individuals to get a ballpark figure of their total liability for the year, which can then be divided into quarterly estimated payments. The estimator helps you determine whether you have enough tax withheld from your income or need to make additional estimated payments to avoid penalties.

A Step-by-Step Calculation Walkthrough

Let’s walk through a simplified calculation using the safe harbor method for a self-employed individual:

1. Reference Last Year’s Return: Your prior year’s Form 1040 shows a total tax of $25,000.

2. Account for High Income: Your AGI was $160,000 last year, so you must pay 110% of last year’s tax ($25,000 x 1.10 = $27,500).

3. Calculate Quarterly Payment: Divide by 4 ($27,500 ÷ 4 = $6,875 per quarter).

4. Include Self-Employment Tax: Remember that your total liability includes both income tax and self-employment tax (15.3% for Social Security and Medicare).

These calculations are for federal taxes. If you have a higher income or a cdcomplex financial situation, you may also need to account for the alternative minimum tax when determining your estimated payments.

Tax Credits and Deductions

Taking advantage of tax credits and deductions can significantly lower your income tax liability. Tax credits, such as the child tax credit, American Opportunity Tax Credit, and Earned Income Tax Credit, directly reduce the amount of tax you owe, often resulting in a larger tax refund. Deductions, on the other hand, lower your taxable income, which can move you into a lower tax bracket and reduce your overall tax bill. Common deductions include student loan interest, mortgage interest, and charitable contributions. For freelancers, additional deductions may include business expenses such as home office costs, vehicle expenses related to business use, supplies and equipment, professional services, health insurance premiums, and business travel expenses.

To maximize your savings, keep detailed records of your expenses and consult a professional to ensure you’re claiming all the credits and deductions you qualify for. Tax preparation software can also help you identify eligible credits and deductions, making it easier to file your income tax return and potentially increase your refund.

State and Local Income Taxes

In addition to federal income tax, states and localities impose their own income taxes, which can vary significantly depending on where you live. Some states use a progressive tax system similar to the federal system, while others use a flat tax rate across all income levels. State and local taxes can also be reduced by credits and deductions specific to your state.

It’s essential to understand your state and local tax obligations, as these can impact your total tax and the amount you need to pay in estimated tax payments. Consulting a tax professional familiar with your state’s tax laws or using tax preparation software with state modules can help ensure you’re meeting all your tax requirements and taking advantage of any available credits or deductions for the best possible tax refund.

Key Deadlines and Payment Options

Staying on top of due dates is as important as the calculation itself. For estimated tax purposes, the IRS sets specific quarterly deadlines:

• Q1: April 15

• Q2: June 15

• Q3: September 15

• Q4: January 15 of the following year

Missing these deadlines can result in interest charges on any unpaid amounts, as the IRS imposes interest on late or underpaid estimated taxes.

If a due date falls on a weekend or a legal holiday, the deadline is extended to the next business day. You can pay online via the IRS Direct Pay system, by phone, or through the Electronic Federal Tax Payment System (EFTPS).

Record Keeping and Payment Tracking

Keeping accurate records is crucial for managing your estimated tax payments and avoiding surprises at tax time. Track all sources of income, business expenses, and each tax payment you make throughout the year. Use spreadsheets or accounting software to organize your records and monitor your estimated tax liability as your income changes.

Be sure to retain copies of your prior year’s tax refund, as this information is often needed to calculate your current estimated payments. Good record keeping not only helps you avoid underpayment penalties but also ensures you’re prepared to claim all eligible deductions and credits, maximizing your potential refund. Tax preparation software can further simplify the process by helping you track payments and organize your documents for your income tax return.

Common Pitfalls and How to Avoid an Underpayment Penalty

The IRS charges an underpayment penalty, also known as the estimated tax penalty, if you don’t pay enough tax through withholding and estimated quarterly tax payments during the year. You can avoid this penalty by:

• Using the safe harbor rule based on your prior year’s tax return

• Owing less than $1,000 in tax after subtracting withholding

• Paying at least 90% of the current year’s tax liability

Suppose you owe money when you file your tax return. In that case, you may face additional penalties and interest, so it’s important to make timely estimated payments and understand the rules for avoiding the estimated tax penalty.

Many taxpayers are surprised by estimated taxes when they have a side business in addition to a W-2 job. In this situation, you can either increase your withholding at your main job or make separate quarterly estimated payments for your self-employment income. Remember, it is important to file your tax return on time, even if you cannot pay the full amount owed, to minimize penalties.

When to Seek Professional Tax Advice

While it's possible to calculate estimated taxes yourself, consulting a tax professional is recommended if you have:

• Multiple sources of income (W-2, 1099, investments)

• Significant capital gains from asset sales

• Complex deductions or business structures

• Uncertainty about which calculation method to use

At Steady Co, our tax planning services include precise estimated tax calculations tailored to your unique financial situation. We help you determine the optimal payment strategy to maintain cash flow while avoiding penalties, turning a complex quarterly task into a simple, automated process. Connect with our team today to set yourself up for financial success.

Estimated Tax Payments FAQs

What happens if I don't pay estimated taxes?

If you don't pay enough tax through withholding and estimated payments, you may owe an underpayment penalty. This penalty is essentially interest charged on the amount you underpaid. The IRS has specific rules, but generally, you must pay at least 90% of your current year's tax liability or 100% of your prior year's tax to avoid it.

How do I avoid penalties for underpaying estimated taxes?

The safest way is the "safe harbor" rule. Pay 100% of your total tax from the prior year (110% if your adjusted gross income was over $150,000) in equal quarterly installments. If your income is uneven, the annualized income installment method may also help you avoid penalties.

What is the best way to pay estimated taxes?

The easiest way is to pay online using the IRS Direct Pay system or the Electronic Federal Tax Payment System (EFTPS). These systems are secure, allow you to schedule payments in advance, and provide immediate confirmation. You can also pay by phone or mail with a check and a payment voucher (Form 1040-ES).

Can I just make one big estimated tax payment?

Yes, you can make unequal payments or even one large payment, as long as you meet the required minimum by each quarterly deadline to avoid an underpayment penalty. However, the IRS still breaks the year into four specific payment periods, so a single payment must be timed correctly to cover all previous periods.