Estimated Taxes refer to the payments made to the IRS on a quarterly basis by individuals and businesses who expect to owe tax of $1,000 or more when their annual tax return is filed. These payments are used to cover income that is not subject to withholding, such as self-employment income, interest, dividends, and rent.
Taxpayers are generally required to estimate their tax liability for the year and divide that amount into four equal payments, due in April, June, September, and January of the following year. If the estimated tax payments are less than the actual tax owed when the return is filed, the taxpayer may incur penalties and interest. Conversely, overpayments may result in a refund when the tax return is processed.
For example, a self-employed individual might calculate their expected income and determine that they will owe $4,000 in taxes for the year. They would then make estimated tax payments of $1,000 each quarter to avoid a large tax bill at year-end.
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