Understanding Estimated Taxes

LP Tax & Bookkeeping Pros LLC
Ralph Pinney, EA
Greenville, TX 75401
303-881-9762

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What Are Estimated Taxes, and Do You Need to Pay Them?

Here’s the reality: the federal income tax system is pay-as-you-go. The IRS wants its money throughout the year, not all at once in April. There are two ways to make this happen—either your employer withholds taxes from your paycheck, or you make estimated tax payments directly to the IRS yourself.

If You’re an Employee

If you work for someone else and get a W-2, your employer is already withholding income tax from every paycheck. They may also withhold from other income like pensions, bonuses, commissions, IRA distributions, and even gambling winnings. If withholding covers all your tax liability, you probably don’t need to worry about estimated taxes.

But here’s what I want you to understand: life changes during the year. You get married, have a baby, start a side business, or maybe you have deductions or credits that shift your tax picture. When that happens, you should fill out a new Form W-4 with your employer so they withhold the right amount. Otherwise, you could end up owing at tax time—or worse, facing penalties.

If You Have Income Without Withholding

Estimated taxes are for income that doesn’t have taxes automatically taken out. This includes:

• Self-employment income
• Interest and dividends
• Rental income
• Capital gains from selling assets
• Alimony (for older divorce agreements)
• Prizes and awards

You might also need to make estimated payments if your employer isn’t withholding enough to cover your total tax bill.

Here’s something important: estimated tax isn’t just about income tax. It also covers self-employment tax (Social Security and Medicare for self-employed folks) and alternative minimum tax if that applies to you. Even if you’re going to get a refund when you file your return, if you didn’t pay enough during the year through estimated payments, the IRS can hit you with a penalty. I know—it doesn’t seem fair, but that’s how their system works.

Who Must Pay Estimated Taxes?

General Rule

You generally need to make estimated tax payments if both of these apply to you:

1. 1. You expect to owe at least $1,000 in tax for the current year after subtracting your withholding and refundable credits, AND
2. 2. You expect your withholding and credits to be less than the smaller of:

   • 90% of the tax on your current year return, OR

   • 100% of the tax shown on your prior year’s return (if it covered all 12 months)

Important exception: If your 2024 adjusted gross income was more than $150,000 ($75,000 if married filing separately), substitute 110% for that 100% figure.

Listen, I know that sounds like a lot of math. Here’s the simple version: if you’re self-employed, own rental property, have significant investment income, or had a big tax bill last year that wasn’t covered by withholding, you probably need to make estimated payments.

Who Doesn’t Have to Pay Estimated Taxes?

You can skip estimated payments if you meet all three of these conditions:

• You had no tax liability for the prior year (meaning your total tax was zero or you didn’t have to file a return)
• You were a U.S. citizen or resident for the whole year
• Your prior tax year covered a full 12 months

If you get a salary or wages and want to avoid the hassle of estimated payments altogether, here’s a trick: ask your employer to withhold extra from your paycheck. Just fill out a new Form W-4 and enter the additional amount you want withheld on line 4c. Problem solved.

When to Pay Estimated Taxes

The IRS divides the year into four payment periods, and each one has its own due date. Miss a deadline, and you could face penalties even if you end up getting a refund. Here’s the breakdown:

2025 Estimated Tax Payment Due Dates

For Individuals (Personal Returns):

Payment Period	Tax Period Covered	Due Date
First Quarter	January 1 – March 31, 2025	April 15, 2025
Second Quarter	April 1 – May 31, 2025	June 16, 2025
Third Quarter	June 1 – August 31, 2025	September 15, 2025
Fourth Quarter	September 1 – December 31, 2025	January 15, 2026

For Business Returns (Corporations, S-Corps, Partnerships):

The due dates for business estimated taxes follow the same schedule as individual estimated taxes:

Payment Period	Tax Period Covered	Due Date
First Quarter	January 1 – March 31, 2025	April 15, 2025
Second Quarter	April 1 – May 31, 2025	June 16, 2025
Third Quarter	June 1 – August 31, 2025	September 15, 2025
Fourth Quarter	September 1 – December 31, 2025	January 15, 2026

Important note about that fourth quarter payment: You can avoid the underpayment penalty for the fourth installment if you file your 2025 return and pay the balance by January 31, 2026. But here’s something to consider—if you itemize deductions, it might make sense to pay that fourth quarter payment by December 31, 2025, so you can deduct it on your 2025 return.

Mark your calendar: The last date for making estimated tax payments for the 2025 tax year is January 15, 2026.

How to Pay Estimated Taxes

You’ve got several options for making estimated payments:

Option 1 – Pay online at IRS.gov
Go to www.irs.gov/payments and pay directly from your checking or savings account, or use a debit/credit card (though a convenience fee applies if you use a card). Paying online gives you a confirmation number so you can track your payment, and you can view your payment history through your IRS online account.

Option 2 – Use the IRS2Go mobile app
If you prefer to handle everything on your phone, the IRS has a mobile app that lets you make payments from your device.

Option 3 – Schedule payments with EFTPS
The Electronic Federal Tax Payment System (EFTPS) lets you schedule payments in advance from your bank account. This is great if you want to pay weekly, bi-weekly, monthly—whatever works for you, as long as you’ve paid enough by the end of each quarter. You can also access your payment history anytime. Check it out at www.eftps.gov.

Special Taxes You Might Need to Include

Additional Medicare Tax

If you have high income, you may owe an additional 0.9% Medicare tax on:

• Medicare wages
• Railroad Retirement Tax Act compensation
• Self-employment income

This kicks in once your income exceeds the threshold for your filing status. You’ll need to factor this into your estimated payments.

Net Investment Income Tax (NIIT)

There’s also a 3.8% Net Investment Income Tax on the lesser of:

• Your net investment income, OR
• The amount your modified adjusted gross income (MAGI) exceeds the threshold for your filing status

Here are the thresholds:

Filing Status	Threshold Amount
Single, Head of Household, Qualifying Surviving Spouse	$200,000
Married Filing Jointly	$250,000
Married Filing Separately	$125,000

If you have significant investment income—interest, dividends, capital gains, rental income—you may need to include NIIT when you calculate your estimated payments.

What Happens If You Underpay?

Listen, I know estimated taxes can feel like a pain. But if you don’t pay enough throughout the year, the IRS will charge you an underpayment penalty. It doesn’t matter if you’re getting a refund when you file your return—if you didn’t pay enough by each quarterly deadline, you could owe a penalty.

Most taxpayers avoid this penalty if they meet one of these safe harbors:

• They owe less than $1,000 after withholding and credits, OR
• They paid at least 90% of the current year’s tax, OR
• They paid 100% (or 110% if high income) of the prior year’s tax

The penalty can be waived in certain situations:

1. A casualty, disaster, or unusual circumstance caused you to miss payments, and it would be unfair to penalize you

2. You retired after age 62 or became disabled during the year (or the year before), and the underpayment was due to reasonable cause—not willful neglect

Bottom Line

Estimated taxes are part of the deal if you’re self-employed or have income without withholding. The key is to stay on top of those quarterly deadlines and pay enough to avoid penalties. If you’re not sure how much to pay, or if your income fluctuates throughout the year, let’s talk. I can help you figure out a payment strategy that keeps the IRS happy and keeps more money in your pocket.

Give me a call at 303-881-9762, and we’ll walk through your situation together. You don’t have to navigate this alone.

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This document contains general information and should not be relied upon as the only source of tax advice. For guidance specific to your situation, please consult with a tax professional.

Document prepared by:
Ralph Pinney, EA
LP Tax & Bookkeeping Pros LLC
Greenville, TX 75401
303-881-9762