Chapter 2 of Pub. 505: Estimated Tax Payments and Penalties

Estimated tax payments are the quarterly amounts you send the IRS to cover income that isn’t subject to withholding, and you generally have to make them if you expect to owe at least $1,000 when you file.¹ Self-employment earnings, investment gains, rental profits, and retirement account distributions all commonly land you here. Federal tax is pay-as-you-go; waiting until April to settle a full year’s bill triggers a penalty even if you pay in full then.

Who Has to Pay

Two conditions have to be true. You expect to owe $1,000 or more in federal income tax after subtracting withholding and refundable credits, and your withholding plus refundable credits will cover less than the smaller of 90% of this year’s tax or 100% of last year’s tax.² If both apply, quarterly payments are on you.

Self-employment is the usual reason. No employer is withholding anything, and the obligation covers both income tax and self-employment tax for Social Security and Medicare, which you work out on Schedule SE.³ For 2026, the Social Security portion runs 12.4% on the first $184,500 of net earnings, and Medicare adds 2.9% on all net earnings with no cap.⁴ That alone can clear the $1,000 threshold before income tax enters the picture.

Other income that commonly puts you on the hook: capital gains from selling stocks or property, taxable retirement distributions without withholding, rental income, royalties, and large freelance or gig payments. Even W-2 employees can need estimated payments when a side hustle or investment income outruns what their paycheck withholding covers.

A higher bar applies to high earners. If last year’s adjusted gross income was more than $150,000 (or $75,000 if married filing separately), the prior-year safe harbor rises from 100% to 110% of last year’s tax.² A year with a big income jump is where people get caught.

Figuring Out How Much to Pay

Your required annual payment is the smaller of 90% of this year’s tax or 100% of last year’s tax (110% if you’re a high earner). Divide by four, and that’s your minimum per quarter.² You only need to satisfy one of these tests, and three methods get you there.

Prior Year Safe Harbor

The simplest route. Take last year’s total tax from your Form 1040, multiply by 100% (or 110% if your AGI was over $150,000), divide by four, and pay that each quarter. No income projection, no guesswork. If your income doubles this year, you still avoid the penalty, though you’ll owe the balance when you file. The downside is the mirror image: if your income drops, you overpay and wait for the refund.

Current Year Projection

If you’d rather pay based on what you actually expect to make, project your full-year income, deductions, and credits, then calculate 90% of the resulting tax. The Form 1040-ES worksheet walks through each step.⁵ Estimate total income, subtract the standard deduction (for 2026, $16,100 single, $32,200 married filing jointly, $24,150 head of household) or your projected itemized deductions, apply the 2026 brackets, subtract credits, add self-employment tax, then subtract any withholding.⁶ The remainder divided by four is your quarterly payment. Remember you can deduct half the self-employment tax when figuring AGI.

If your projection drifts off during the year, redo the worksheet and adjust the remaining installments. The penalty calculation looks at each quarter separately, so timing matters.

Annualized Income Installment Method

When your income arrives unevenly, say from a seasonal business, commission work, or a one-time capital gain, this method prevents the IRS from penalizing you for not prepaying tax on money you hadn’t earned yet. Each installment is based on income actually received through the end of that period, not one-fourth of a full-year estimate.

The calculation uses Schedule AI on Form 2210. The cumulative measuring periods are January 1 through March 31, through May 31, through August 31, and through December 31.⁷ For each period you annualize the income so far, calculate the tax on that annualized figure, and subtract what you’ve already paid. A freelancer who earns $20,000 through September and $80,000 in Q4 would owe small installments the first three quarters with the bulk due in January. More recordkeeping, and you must file Form 2210 with Schedule AI to show the IRS why the earlier payments were smaller.

Quarterly Due Dates

The “quarters” aren’t evenly spaced:⁸

April 15, covering January 1 through March 31
June 15, covering April 1 through May 31
September 15, covering June 1 through August 31
January 15 of the following year, covering September 1 through December 31

When a due date falls on a weekend or federal holiday, it moves to the next business day. The June deadline catches people out because they assume the quarter ends with June. Put all four on your calendar at the start of the year.

You can skip the January 15 payment if you file your return and pay the remaining balance by January 31. Useful if your records are ready early.

How to Pay

Payment options for individuals changed in late 2025. The Electronic Federal Tax Payment System (EFTPS) stopped accepting new individual enrollments as of October 2025. Existing EFTPS users can keep using it for now, but the IRS is pointing individuals to IRS Online Account or IRS Direct Pay.⁹

IRS Direct Pay

The most straightforward option. Direct Pay pulls the payment from your checking or savings account, costs nothing, and requires no enrollment.¹⁰ You can schedule a payment and change or cancel it up to two business days before the scheduled date. The per-payment limit is $10 million. Select “Estimated Tax” as the payment type and set the correct tax year.

IRS Online Account

Setting up an IRS Online Account gives you a dashboard for making payments, checking your balance, reviewing payment history, and seeing anything scheduled. This is the IRS’s preferred replacement for EFTPS for individuals.¹¹ Identity verification through ID.me takes some setup the first time.

Card or Digital Wallet

IRS-authorized processors accept debit cards, credit cards, and digital wallets, but they charge. Debit runs about $2.10 to $2.15 per transaction. Credit cards run 1.75% to 1.85% of the payment, with a $2.50 minimum.¹² On a $5,000 estimated payment, 1.85% is $92.50. Unless rewards exceed that, Direct Pay wins.

Mail

Form 1040-ES includes four tear-off vouchers. Write your Social Security number, the tax year, and “Form 1040-ES” on your check or money order, make it payable to “United States Treasury,” and mail it with the voucher to the address in the 1040-ES instructions. Put the wrong tax year on the check and the IRS can apply the payment to the wrong period, which generates an incorrect penalty notice.

Applying Last Year’s Overpayment

If you overpaid last year, you can apply part or all of the refund to this year’s estimated tax by electing it on your Form 1040. The credit goes to your first quarterly installment, and anything left rolls forward. One warning: once you make that election, you can’t reverse it. If you need the cash later, you wait until next year’s return to see it again.

Avoiding the Underpayment Penalty

The penalty isn’t a flat fine. It’s interest on the amount you underpaid for the time it remained unpaid.² The rate is the federal short-term rate plus three percentage points, adjusted quarterly. For the first quarter of 2026, that’s 7%.¹³ Interest runs from each quarterly due date until you pay the shortfall or until April 15 of the following year, whichever comes first.

The IRS computes each quarter separately. A big Q4 payment doesn’t retroactively fix a Q1 shortfall. You owe interest for the quarters you were short, for the time you were short.

You dodge the penalty entirely if any of the following is true:

You owe less than $1,000 after withholding and refundable credits.¹⁴
You paid at least 90% of this year’s tax through withholding and estimated payments combined.
You paid at least 100% of last year’s tax, or 110% if last year’s AGI was over $150,000.²

Meeting any one protects you. The prior-year safe harbor is popular because it needs no projection: when income is climbing fast, paying 100% (or 110%) of last year’s tax guarantees penalty protection even if the final balance is large.

Waivers

The IRS can waive the penalty on narrow grounds: a casualty, disaster, or other unusual event that made timely payment inequitable, or retirement after age 62 or disability during the tax year or the prior year where the underpayment stemmed from reasonable cause and not neglect.¹⁴ Complete the relevant section of Form 2210 and attach a written explanation with supporting documentation.

Usually the IRS calculates the penalty automatically and sends a notice. You only have to file Form 2210 yourself to claim a waiver or to use the annualized installment method.⁷

Adjusting When Life Changes

Your obligation isn’t fixed. If income shifts mid-year, from a new W-2 job, a business sale, or an unexpected capital gain, recalculate the remaining payments on a fresh 1040-ES worksheet.⁵ You aren’t penalized for starting estimated payments in Q2 or Q3 if the triggering income didn’t exist earlier, as long as the annualized method documents the timing.

If income drops, lower the remaining installments. You’re not locked into Q1’s amount. Just stay on course to meet 90% of actual tax or hit the prior-year safe harbor by year-end.

Narrow Rules Worth Knowing

Farmers and Fishermen

If at least two-thirds of your gross income comes from farming or fishing, you can make a single estimated payment by January 15 of the following year instead of four quarterly ones, or skip estimated payments entirely by filing and paying all tax owed by March 1.¹⁵ The two-thirds test can be met using either the current or prior year’s income.

State Estimated Taxes

Most states with an income tax also require quarterly estimates, but thresholds, deadlines, and penalty rates vary. Some states track the federal schedule, others don’t. State underpayment rates run roughly 7% to 11% in many jurisdictions, stacked on top of any federal penalty. Meeting your federal obligation does not satisfy your state’s; check with your state’s department of revenue.

1
Internal Revenue Service. IRS Form 1040-ES – Estimated Tax for Individuals
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Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax
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Internal Revenue Service. Self-Employment Tax – Social Security and Medicare Taxes
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Social Security Administration. Contribution and Benefit Base
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Internal Revenue Service. Estimated Taxes
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Internal Revenue Service. One, Big, Beautiful Bill Provisions – Individuals and Workers
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Internal Revenue Service. Instructions for Form 2210 – Underpayment of Estimated Tax by Individuals, Estates, and Trusts
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Internal Revenue Service. Individuals – Estimated Tax
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Electronic Federal Tax Payment System. Electronic Federal Tax Payment System – Notice to Individual Taxpayers
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Internal Revenue Service. Direct Pay With Bank Account
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Internal Revenue Service. EFTPS – The Electronic Federal Tax Payment System
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Internal Revenue Service. Pay Your Taxes by Debit or Credit Card or Digital Wallet
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Internal Revenue Service. Interest Rates Remain the Same for the First Quarter of 2026
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Internal Revenue Service. Topic No. 306 – Penalty for Underpayment of Estimated Tax
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Internal Revenue Service. Farming and Fishing Income