Do you need to make estimated tax payments in 2024? (2024)

In the U.S., income taxes are collected on an ongoing basis throughout the year. Employers pay federal and state taxes by withholding a certain amount from each paycheck. But what happens if you are self-employed or earn other types of taxable income?

If you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes, and awards, you may have to make what the IRS terms “estimated tax payments.”¹

Keep reading to learn more about how estimated tax payments work, how to figure out what you owe, and when to pay.

Who is required to make estimated tax payments?

Generally, the IRS requires you to make estimated tax payments using Form 1040-ES² if you expect to owe $1,000 or more in taxes when you file your tax return. For estimated tax purposes, the year is split into four payment periods, with a specific payment due date. If you don’t pay enough tax by the due date of each of the payment periods, you may be charged a penalty. The taxpayer then files the usual tax paperwork for the full year and pays the balance due or requests reimbursem*nt for an overpayment.

A taxpayer who had no tax liability for the prior year, was a U.S. citizen or resident for the whole year and had the prior tax year cover a 12-month period, is generally not required to pay estimated tax.

Types of income that may be taxable

If you are self-employed or have other major sources of income, you may need to make estimated tax payments on a quarterly basis if you expect to owe at least $1000 for 2024.

Examples of taxpayers who typically have estimated tax payment obligations include 1099 workers, W-2 workers who are not withholding enough to cover their tax bill, landlords, investors, and retirees.

Let’s review the types of income that might require you to make estimated tax payments.

Self-employed and business income

Independent contractors, freelancers, and people with side gigs who expect to owe $1,000 or more in taxes will likely need to make estimated tax payments. Since no tax is automatically withheld from their income by an employer, the individual is responsible for estimating their tax liability and making payments by the due date. Likewise, corporations may also need to make estimated income tax payments if they'll owe at least $500 for the tax year.

Capital gains, interest, and dividends from investments

Capital gains taxes are owed when assets such as investment securities, real estate or investment property, are sold for more money than was paid for the asset. So, if you bought a stock for $1,000 and sold it for $2,000, you would realize a capital gain of $1,000. You will owe tax on this $1,000 capital gain during the tax year when you sold the asset.

Read more: Ways to avoid or minimize capital gains tax

Similarly, it may be necessary for you to make estimated tax payments on investment income. You can use the Qualified Dividends and Capital Gains Worksheet” available in IRS Publication 505 to estimate the additional tax liability. It's important to remember that the tax rate on net capital gains is generally lower than the tax rate on ordinary income.

Estates and trusts

Generally, a fiduciary of an estate or trust must pay estimated tax if the estate or trust is expected to owe at least $1,000 in tax for 2024 and can expect its withholding and credits to be less than the smaller of:

1. 90% of the tax shown on the 2024 tax return; or

2. The tax shown on the 2023 tax return (110% of that amount if the estate’s or trust’s adjusted gross income (AGI) on that return is more than $150,000). However, if a return wasn’t filed for 2023 or that return didn’t cover a full 12 months, item (2) above doesn’t apply.

You must use Form 1041-ES³ to figure and pay estimated tax for an estate or trust.

Read more: Why use a trust

Rental income

If you own rental properties and expect to owe at least $1000 in taxes for 2024, you’ll need to make estimated tax payments quarterly. If you work and have income tax withheld from your pay, you'll need to pay estimated tax only if your total withholding (and any tax credits) amounts to less than 90% of the total tax you expect to pay for the year. Thus, you can avoid paying any estimated tax if your withholding is sufficient to pay 90% of the tax you'll owe on all your income, including your rental income.

Retirement income

When you get to retirement, you generally have multiple income sources that may or may not have the appropriate taxes withheld. Since the amounts withheld may not cover your total tax liability, it makes sense to review all your sources of income and their withholdings to determine if there’s a gap between the amount you are paying in taxes and how much you’ll owe. To check your withholdings, review your:

• 401(k), 403(b), and other qualified workplace retirement plans

• Annuities and pensions

• Social security benefits

• Taxable bank or brokerage accounts

• Traditional, SEP, and SIMPLE IRAs

Read more: What taxes do I pay in retirement?

Alimony and miscellaneous income

Alimony payments received by the former spouse are taxable and you must include them in your income and make estimated tax payments if necessary. The same applies for any other miscellaneous income, including “prizes” such as awards, sweepstakes, raffle, and lottery winnings. Because the payor may not withhold income taxes, you may want to consult a tax pro to determine if you should make estimated tax payments to cover the taxes resulting from the winnings.

How to assess your estimated tax obligations

You can use the Estimated Tax Worksheet on Form 1040-ES to figure out and pay your estimated tax for 2024. The form gives step-by-step guidance on calculating estimated tax owed, though as a general rule, you must pay estimated tax for 2024 if both of the following apply:

1. You expect to owe at least $1,000 in tax for 2024, after subtracting your withholding and refundable credits.

2. You expect your withholding and refundable credits to be less than the smaller of:

1. 90% of the tax to be shown on your 2024 tax return

or

2. 100% of the tax shown on your 2023 tax return. Your 2023 tax return must cover all 12 months (110% in the case of individuals with adjusted gross income in excess of $150,000 or $75,000 if married filing separately).

Form 1040-ES includes a voucher for mailing tax payments and instructions for mailing tax payments via a check or money order. If you choose to mail in your payment, there is a separate estimated tax payment voucher for each due date. However, the IRS highly encourages taxpayers to consider electronic methods of payment.

The Electronic Federal Tax Payment System (EFTPS) allows you to pay your taxes online or by phone directly from your checking or saving account, with no fees. You can also download the IRS2Go app to pay with your mobile device or pay via your IRS online account.

When are estimated tax payments due?

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date.

The final quarterly tax payment for 2023 was due by January 16, 2024. Quarterly estimated tax payments for the 2024 tax year are due April 15, June 17, and September 16. The final payment is due January 2025.

Determining estimated tax payments

The simplest way to calculate your estimated tax is to estimate your total tax liability for the year based on the year previous, then divide the total estimated tax liability into four quarterly payments. For example, if in 2023 your total tax liability was $10,000, assume you will owe $10,000 in 2024 and send $2,500 each quarter. If you think your taxable income will either increase or decrease from the previous year, you’ll need to take that into account and adjust your estimate accordingly.

Alternatively, you can estimate your annual tax liability based on what you’ve already earned during the year. This is often better for people whose income varies, such as self-employed individuals with fluctuating incomes. With this method, you estimate your tax bill at the end of each quarter based on a reasonable expectation of your income and deductions so far this year.

In either case, you'll use IRS Form 1040-ES to show your income estimate and project your tax liability. IRS Publication 505 provides additional guidance for estimating quarterly tax amounts and how to take credit for them on your return.

If you overestimate or underestimate your earnings, you can complete another Form 1040-ES and refigure your estimated tax for the next quarter. When you file your annual return, you’ll likely need to attach IRS Form 2210 to explain why you didn’t send equal payments. If you paid too much, you could get a refund or apply the overage as a credit to future payments. If you have underpaid, you may be subject to penalties and interest.

Avoiding penalties and interest

The IRS will charge penalties if you don’t pay enough tax throughout the year. The IRS can charge you a penalty for late or inadequate payments even if you're due a refund when you file your tax return. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% (or 110% depending on AGI) of the tax shown on the return for the prior year, whichever is smaller. The penalty may be waived if:

• You were a victim of a casualty, disaster, or other unusual circ*mstance, or

• You’re at least 62, retired or became disabled this year or last year, and your underpayment was due to “reasonable cause” rather than “willful neglect.”

The bottom line

Paying your estimated quarterly taxes is a straightforward process once you determine your obligation to pay and estimate your total tax liability for the year. Remember, your state might also expect quarterly tax payments, and the threshold to pay quarterly taxes for your state might be lower than the federal threshold. Check your state tax department's website for details and reach out to a tax preparation professional if you need further guidance.