estimated taxes
Quarterly tax payments required by the IRS from self-employed individuals and investors who don't have sufficient withholding to cover their annual tax liability.
Example
“As a freelancer, he made quarterly estimated tax payments to avoid the underpayment penalty in April.”
Memory Tip
ESTIMATED taxes = quarterly prepayments for freelancers and investors. Due April, June, September, January.
Why It Matters
Estimated taxes help self-employed individuals and investors avoid large tax bills at year-end while also preventing penalties and interest charges from the IRS. Understanding when and how much to pay ensures you stay compliant with tax laws and manage your cash flow effectively throughout the year.
Common Misconception
Many people believe that estimated taxes only apply to self-employed individuals, but investors who earn significant income from dividends, capital gains, or rental properties may also need to make quarterly payments. Additionally, some assume they can skip payments if they expect a refund, which can result in penalties even if they ultimately owe nothing.
In Practice
A freelance graphic designer earning 75000 dollars annually with no employer withholding must pay approximately 18750 dollars in estimated taxes each quarter, or roughly 4688 dollars per payment in April, June, September, and January. If she only pays 2000 dollars per quarter, she will face penalties and interest on the 10688 dollars shortfall, even if she ultimately owes taxes and would eventually receive a refund.
Etymology
ESTIMATED (calculated approximately) TAXES. Paying ESTIMATED TAX installments quarterly throughout the year.
Common Misspellings
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Related Terms
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See Also
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