What Are Quarterly Taxes?

The U.S. tax system is pay-as-you-go, which means income taxes need to be paid throughout the year rather than all at once when you file your tax return.

Employees usually accomplish this through taxes withheld from their paychecks. Business owners often don't have taxes withheld from their business income, so they may need to make estimated tax payments throughout the year instead. These payments are commonly referred to as quarterly taxes.

You may need to make estimated tax payments if you expect to owe at least $1,000 when you file your tax return.

How Do I Calculate Quarterly Taxes?

There are a couple of different ways to determine how much you should pay.

Probably the simplest is to use the safe harbor rules. You can avoid an estimated tax underpayment penalty if your payments and withholding cover at least 90% of your current year's tax, or 100% or 110% of your prior year's tax, depending on your income.

Using your prior year's tax can be particularly simple because you already know the amount. Instead of trying to predict exactly how much you'll make this year, you can base your payments on a tax return that has already been completed.

Another option is the annualized income installment method. This can be useful when your income changes significantly throughout the year, such as when you start a business partway through the year.

Rather than assuming your income was earned evenly throughout the year, this method looks at the income you've actually earned during each period and uses it to determine the required payment. The calculation can get complicated, so this is one situation where working with a tax professional can be helpful.

How Do Quarterly Taxes Work With My Annual Taxes?

Quarterly taxes aren't a separate tax. They're payments toward the taxes that will ultimately be calculated on your annual tax return.

For a self-employed business owner, this can include both federal income tax and self-employment tax.

When your annual tax return is prepared, your actual tax liability for the year is calculated. Your estimated tax payments and any taxes withheld from other income are then applied against that amount.

If you paid more throughout the year than you ultimately owe, you'll receive a refund. If you paid less, you'll owe the remaining balance when you file your tax return.