If taxes aren't withheld from the income you receive, making quarterly estimated tax payments can help you avoid paying a big tax bill or an underpayment penalty in April.
When you're self-employed, federal, state, and Social Security taxes aren't taken out of the income you receive.
Instead of paying the entire amount you owe in April, setting up estimated tax payments gives you the flexibility to make four smaller payments during the year.
There are other types of income where taxes also aren't withheld. You'll want to consider making estimated tax payments when you receive significant income from the following sources:
- Earnings from a business
- Gains from the sale of stock or other assets
- Interest income
- Rental income
Avoid possible penalty
If you underpay your taxes during the year, you might face a penalty at tax time. Here's how to determine what you need to pay and when.