Quarterly Estimated Tax Payments

Who Has to Pay Estimated Tax

The United States runs on a pay-as-you-go system. Employees satisfy it through payroll withholding. Everyone else satisfies it through quarterly estimated tax payments under IRC Section 6654 for individuals and IRC Section 6655 for corporations.

You generally must make estimated payments if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits, and your withholding and credits will be less than the smaller of 90% of the current year tax or 100% of the prior year tax. The $1,000 threshold is low enough that most business owners, partners, S-Corporation shareholders, landlords, retirees taking distributions, and anyone with meaningful investment income falls inside it.

The income types that most often create an estimated tax obligation are self-employment earnings, K-1 income from partnerships and S-Corporations, rental income, interest and dividends, capital gains including cryptocurrency dispositions, taxable retirement distributions where no withholding was elected, and the taxable portion of Social Security. Two items catch people repeatedly: a large one-time capital gain from selling a property or a block of stock, and the first year after a business becomes profitable, when there is no prior year tax to fall back on.

There is a narrow exception. No penalty applies if you had no tax liability for the prior year, the prior year covered a full 12 months, and you were a US citizen or resident for the entire year. Farmers and fishermen who derive at least two-thirds of gross income from those activities have their own rules, with a single January 15 installment and a March 1 filing option.

The Four Deadlines and the Uneven Periods They Cover

The word quarterly is misleading. The payment periods are not three months each, and treating them as such is how people underpay the second installment.

First installment, due April 15. Covers income earned January 1 through March 31, a three-month period.

Second installment, due June 15. Covers April 1 through May 31, a two-month period.

Third installment, due September 15. Covers June 1 through August 31, a three-month period.

Fourth installment, due January 15 of the following year. Covers September 1 through December 31, a four-month period.

When any of these falls on a Saturday, Sunday, or legal holiday, the deadline moves to the next business day. For the 2026 tax year that means April 15, 2026, June 15, 2026, September 15, 2026, and January 15, 2027, all of which fall on business days. Our tax deadline calendar lists these alongside every other federal filing date.

The January installment may be skipped entirely if you file your return and pay the full balance due by January 31. That option is useful for taxpayers who want to finalize the year before committing cash.

Payments are made through IRS Direct Pay, the Electronic Federal Tax Payment System, or by mail with Form 1040-ES vouchers. We recommend EFTPS for business owners because it schedules payments in advance and keeps a permanent payment history that is far easier to reconcile at filing than bank records. Corporations must use EFTPS; paper checks are not an option for corporate estimated tax.

Safe Harbors: 90%, 100%, and 110%

IRC Section 6654(d) provides that no penalty applies if your timely payments equal or exceed the lesser of two amounts.

90% of the current year tax. This requires accurately predicting a number you will not know until the year ends. It is a poor primary strategy for anyone with variable income.

100% of the prior year total tax. This is a known, fixed number taken from line 24 of the prior year Form 1040. If prior year adjusted gross income was $150,000 or less, paying 100% of that figure in four equal timely installments eliminates the penalty entirely, no matter how much the current year income grows.

110% of the prior year total tax. If prior year AGI exceeded $150,000, or $75,000 for married filing separately, the threshold rises to 110%. Most of our clients fall into this band.

The prior year safe harbor is the workhorse. If your 2025 total tax was $180,000 and your 2025 AGI was above $150,000, paying $198,000 across the four 2026 installments protects you from any underpayment penalty even if your 2026 tax turns out to be $400,000. You will owe the difference on April 15, 2027, but you will owe no penalty on it. That is a cash flow decision, not a compliance failure, and for a taxpayer with a large one-time gain it is usually the right call.

Two conditions are frequently overlooked. The prior year return must have covered a full 12 months, which excludes a taxpayer's first partial year. And the payments must be timely. Paying the full annual safe harbor amount in December does not cure the missed April, June, and September installments, because the penalty is computed period by period.

Three Ways to Calculate the Payments

Prior year method. Take the prior year total tax, multiply by 100% or 110% as applicable, subtract expected withholding, and divide by four. This is the simplest approach and it carries no estimation risk. Its weakness is cash flow: in a year when income drops sharply, you overpay and wait for a refund.

Current year projection. Project current year taxable income, compute the tax including self-employment tax, the net investment income tax under IRC Section 1411, and the Additional Medicare Tax, apply credits, and pay 90% in four installments. This matches payments to actual liability and preserves cash, but it requires a reliable projection and it exposes you to penalty if income comes in higher than expected. We update the projection each quarter for clients using this method rather than setting it once in April.

Annualized income installment method. This is the method that solves seasonal and lumpy income. Instead of assuming income is earned evenly, you compute income for each cumulative period, January through March, January through May, January through August, and the full year, annualize each, calculate the tax on the annualized figure, and pay only the portion attributable to that period. The computation is done on Form 2210 Schedule AI.

The annualized method is the right choice for a consultant whose fees land in the fourth quarter, a business owner who sells a property in November, a firm that pays partner distributions late in the year, and anyone realizing a large capital gain mid-year. Without it, a taxpayer who earns nothing through August and $600,000 in December owes penalties on the April, June, and September installments even though there was no income to pay tax on. With it, the first three installments are properly small and the liability falls in the fourth period where the income actually arose. The tradeoff is real recordkeeping: you need income and deduction figures cut at March 31, May 31, and August 31, which means the books must be current on those dates.

Withholding as a Planning Tool

There is an asymmetry in the rules that is worth exploiting. Estimated tax payments are credited on the date they are actually made. Withholding is treated as paid ratably throughout the year regardless of when it was withheld, under IRC Section 6654(g).

That means a taxpayer who reaches November and realizes the first three installments were short can fix the entire year by increasing withholding rather than by making a large estimated payment. A December bonus with heavy federal withholding, an increased Form W-4 withholding rate for the last pay periods, or federal withholding elected on an IRA distribution under Form W-4R all get spread back across all four periods and can eliminate a penalty that a same-day estimated payment would not touch.

This is the single most useful late-year correction available, and it applies to households where one spouse has W-2 income and the other has business income, to S-Corporation owners who can adjust withholding on their own payroll, and to retirees with distribution flexibility. It has to be executed before December 31, so it belongs in a fourth-quarter planning conversation, not an April one.

The reverse also matters. If you rely on a spouse's withholding to satisfy the safe harbor and that withholding drops mid-year because of a job change, the shortfall has to be caught in estimated payments starting with the next installment.

How the Penalty Works, and the Waivers That Exist

The underpayment charge is interest, not a flat fine. For each installment, the IRS computes the shortfall and charges the federal short-term rate plus three percentage points, running from that installment due date until the amount is paid or until the return due date, whichever comes first. The rate is reset quarterly and has recently sat in the 7% to 8% range.

Because it is computed per period, the timing of payments matters as much as the total. A taxpayer who pays nothing until September and then pays the full year amount still owes charges on the April and June shortfalls. Conversely, a taxpayer who front-loads payments in April and June accrues nothing later even if the last installment is small.

The calculation and any exception are reported on Form 2210. In many cases the IRS computes the amount and bills it, which means taxpayers who qualify for the annualized method or a waiver need to file the form affirmatively rather than waiting for a notice.

Waivers are available in three circumstances. The IRS may waive the penalty where the underpayment resulted from casualty, disaster, or other unusual circumstances and imposing it would be inequitable. It may waive it where the taxpayer retired after reaching age 62 or became disabled during the tax year or the preceding year and the underpayment was due to reasonable cause. And the IRS periodically issues broad relief notices after significant law changes or filing season disruptions. The First Time Abate program does not apply to the estimated tax penalty, which is a point of frequent confusion; FTA covers failure to file, failure to pay, and failure to deposit, not IRC Section 6654.

States impose their own estimated tax regimes with their own thresholds, safe harbors, and rates, and they do not always match the federal rules. California requires 30%, 40%, zero, and 30% of the annual amount across the four installments rather than four equal payments, and applies a 110% prior year rule above $150,000 of AGI with a different high-income rule above $1 million. New York, New Jersey, and several other states have their own variations. Multi-state business owners and anyone with a pass-through entity tax election need the state calculation run alongside the federal one, which we cover under multi-state and global tax.