Federal income tax is a pay-as-you go tax that employees pay automatically through tax withholding. Tax withholding occurs when an employer holds back a portion of a worker's pay and sends it to the government to cover the worker's tax liability. Certain taxpayers -- such as self-employed workers, people with significant sources of passive income and workers with inadequate tax withholding -- are required to make quarterly estimated tax payments to the Internal Revenue Service.
Estimated Tax Basics
Estimated tax payments are due four times a year to cover tax liability associated with income earned in each quarter. According to the IRS, you generally have to make estimated tax payments if you expect to owe more than $1,000 in taxes at the end of the year after subtracting your withholding and refundable tax credits. You don't need to pay estimated taxes unless you expect your withholding and refundable credits to be less than the smaller of 90 percent of your tax liability for the year or 100 percent of your tax liability from the previous year.
Self-employed workers like business owners, contractors and freelancers are not subject to income tax withholding. As a result, most self-employed workers have to make quarterly tax payments to pay federal income taxes and self-employment tax, which includes amounts for Social Security and Medicare. Business owners pay taxes on net earnings or profit from self-employment, so if a business isn't profitable, the owners may owe little or no income tax.
The IRS taxes many sources of passive or unearned income that are not subject to tax withholding. Sources of unearned income include interest paid on deposits at banks, dividends, capital gains from selling stocks and other assets and alimony payments. If you have income from passive sources that increase your taxable income to a point where you expect to owe more than $1,000 in taxes at the end of the year, you have to make estimated tax payments.
Normal employees may have to make estimated tax payments in the case of inadequate tax withholding. When you take a new job, you have to fill out a tax form called a W-4 to set up your income tax withholding. Form W-4 lets you claim allowances to decrease your tax withholding; if you claim too many allowances, your employer might not withhold enough money from your pay to cover your income tax liability. Employees with inadequate withholding can request a new W-4 to alter their tax withholding to make estimated tax payments instead. Technically, anyone can voluntarily make estimated tax payments, even people who do not expect to owe tax of $1,000 or more.