A Quick Guide to Estimated Taxes (and Why You Might Still Owe)

Estimated Taxes, Explained

A quick guide to what they are, why they matter, and how to avoid penalties.

Let’s talk about something exciting. Just kidding. We’re talking about taxes. But if you’ve ever made money that didn’t come with a W-2 and automatic withholding, you’ve probably heard about estimated tax payments.

Even if you’re already making them, you might still get hit with a surprise bill come April. Here’s why they matter, how they work, and how to avoid (at least some) frustration at tax time.

What Are Estimated Tax Payments, Really?

If you’re self-employed, doing freelance work, getting rental income, or just living that side hustle life, the IRS expects you to pay taxes on that income as you earn it - not just when you file in April.

Instead of one big payment at the end of the year, you’re supposed to send in taxes quarterly. These are called estimated payments, and they’re kind of like “pay as you go” for grown-ups with variable income.

You might need to make estimated payments if you:

• Are self-employed or run a small business

• Get dividends, capital gains, or rental income

• Work a job with little or no tax withholding

• Have a year where your income jumps and your W-2 can’t keep up

Why They Matter (a Lot)

Estimated tax payments are one of those things you don’t think much about… until the IRS hits you with a penalty.

The IRS expects you to pay taxes as you earn income. If you underpay during the year, even if you make it up in April, you can get dinged with an underpayment penalty.

It’s not outrageous, but it’s annoying. The penalty is basically interest on the amount you should have paid, and it’s calculated based on the IRS’s current interest rate (which, as of 2025, is around 8%).

Let’s say you owed $10,000 in taxes but only paid $5,000 during the year. The penalty could be about $200–$400, depending on the timing of your payments. Not life-changing, but enough to sting, especially if you were trying to do the responsible thing.

Estimated payments help you avoid that, and:

• Keep your cash flow more predictable

• Reduce stress when tax season rolls around

• Help you stay ahead of big jumps in income that could affect your tax bracket

How Much Do You Need to Pay?

Here’s where it gets a little technical, but stay with me.

There are two ways to calculate how much to pay each quarter:

• 90% of your current-year tax liability, or

• 100% of your prior-year tax liability (110% if your income was over $150K)

Most people stick with the prior-year method since it’s simpler. You already have the number, and it’s a safe harbor against penalties. But there are times when it makes sense to switch it up. If your income this year is significantly lower (maybe you left a job, took time off, or just have fewer contracts coming in), basing payments on current-year income could help you avoid overpaying throughout the year.

Either way, the goal isn’t necessarily to get it exactly right. The goal is to pay enough to avoid the underpayment penalty and then true up when you file.

Whichever method you choose, your estimated tax payments are typically due in four quarterly installments:

• Q1: April 15

• Q2: June 15 (note this is only 2 months after Q1!)

• Q3: September 15

• Q4: January 15 (of the following year)

But Wait… Why Might I Still Owe?

This is where people get tripped up. Making estimated payments helps you avoid penalties, but it doesn’t guarantee you won’t owe more in April.

You can still end up underpaying (or overpaying) depending on:

• Getting a big bonus or windfall late in the year

• Selling investments and realizing gains

• Not accounting for enough deductions or credits

• A major life change such as a new job, baby, move, etc.

So yes, even if you’ve been diligent with your payments, you might still cut a check come tax season. But at least you won’t owe a penalty on top of it. Small wins.

Don’t Forget About State Taxes

Yep, some states want a piece of the action, too. If your state has an income tax, you may need to make quarterly payments there as well (shout out to my home state of California). It’s worth double-checking so you don’t get surprised.

Bottom Line

Estimated taxes can be a pain, but they’re manageable with the right game plan. And while they help you avoid penalties, they don’t guarantee you won’t owe more (or get a refund) at tax time. The better your estimates, the less surprise later on. If you’re navigating inconsistent income or major changes this year, it’s worth checking in with a tax advisor to fine-tune your approach. They can help you dial in the right payment strategy so you’re not leaving too much (or too little) on the table.

And hey, if you’re already making them? Gold star. Just remember that “estimated” really means estimated. Things change. Revisit regularly. Adjust when you need to. And maybe stash a little extra just in case.