Understanding Estimated Tax Payments: What You Need to Know

May 12, 2025

Tax season can be a daunting time, especially if you’re self-employed or have multiple income streams. Imagine this: You’re a freelancer who had a booming year, only to face a staggering tax bill—plus penalties—because you didn’t prepay your taxes. This scenario is all too common, but it’s avoidable with estimated tax payments. Let’s break down what you need to know to stay ahead of the game.

What Are Estimated Tax Payments?

Estimated tax payments are advance payments of income tax made throughout the year on income that isn’t subject to withholding. This includes earnings from self-employment, interest, dividends, rental properties, capital gains, etc. The IRS requires taxpayers to pay taxes as they earn income, rather than waiting until the annual tax filing deadline. This means that for self-employed individuals, freelancers, investors, and others with untaxed income, unlike traditional employees whose taxes are withheld from paychecks, must proactively pay taxes quarterly. These payments help prevent large tax balances and potential penalties at year-end.

Who Needs to Make Them?

For federal taxes, you are required to make estimated tax payments if you:

  1. Expect to owe at least $1,000 in federal income tax after subtracting withholding and refundable credits, and
  2. Your withholding and credits are less than:
    • 90% of the total tax for the current year, or
    • 100% of the tax shown on the return for the previous year.
    • For higher-income individuals with an adjusted gross income above $150,000 ($75,000 if married filing separately), the threshold increases to 110% of prior year’s tax.

For state of California, you are required to make estimated tax payments if you:

  1. Expect to owe at least $500 in state income tax ($250 if married filing separately), and
  2. Your withholding and credits are less than:
    • 90% of the tax shown on your current year’s return, or
    • 100% of the tax shown on your prior year’s return.
    • If your adjusted gross income is over $150,000 (or $75,000 if married filing separately), the threshold increases to 110% of prior year’s tax.
    • If your adjusted gross income exceeds $1 million, you cannot rely on the prior-year’s tax at all. You must pay 90% of your current year’s tax through estimated payments and withholding.

The above federal and California obligations apply to full-time freelancers, small business owners, landlords, and even W-2 employees with substantial side income.

When Are Federal and California Estimated Payments Due?

For federal, four estimated tax payments are required each year, with due date and the covered income period of each installment shown below:

  • April 15: First installment, covering income earned from January 1 through March 31
  • June 15: Second installment, covering income earned from April 1 through May 31
  • September 15: Third installment, covering income earned from June 1 through August 31
  • January 15 of the following year: Fourth installment, covering income earned from September 1 through December 31

Unlike the federal system, California front-loads estimated tax payments, requiring 70% of the annual estimated tax to be paid by June 15. The payment schedule is as follows:

  • April 15: First installment, covering 30% of the annual state tax
  • June 15: Second installment, covering 40% of the annual state tax
  • January 15 of the following year: Final installment, covering the remaining 30% of the annual state tax

If a due date falls on a weekend or holiday, it is pushed to the next business day.

How to Calculate Your Estimated Payments

The IRS provides Form 1040-ES with a worksheet to help estimate your tax liability for the year. Many taxpayers rely on the prior year’s return as a guide, especially if their income and deductions remain consistent. Tax software can simplify the process by calculating payment amounts based on projected income. It’s also essential to account for self-employment taxes (Schedule SE) if you’re running a business or freelancing, as these cover your contributions to Social Security and Medicare.

How to Make the Payments

For federal, estimated tax payments can be made electronically through the IRS Direct Pay, which allows you to pay directly from your bank account without a fee. If you prefer to mail a check, you can do so using a payment voucher from Form 1040-ES. Most tax software platforms offer the ability to schedule these payments as part of your tax planning tools.

California also offers several ways to pay, including online via Web Pay or by mailing Form 540-ES along with your payment.

What Happens If You Don’t Pay Enough?

Failing to make adequate estimated payments on time throughout the year can result in underpayment penalties, even if you pay your full tax balance when you file your return. Both the IRS and the California FTB calculate penalties based on how much you underpaid and how long the payment was late. In some cases, if your income fluctuates dramatically during the year, you may be able to use the annualized income method to adjust your payment amounts and timing to reduce or eliminate penalties.

Tips for Staying on Track

To stay on top of your estimated tax responsibilities, monitor your income regularly and set aside a portion for taxes as you go. If your income is variable, consider revisiting your estimates before each quarterly payment. Using accounting software or consulting a tax professional can help ensure accuracy and peace of mind. Planning ahead and making timely payments will help you avoid surprises and maintain control over your tax situation.

Tax laws are complex. Consult a CPA or tax advisor for personalized guidance. At Bing Luo CPA, we are committed to providing expert guidance to help you make well-informed decisions.