Quarterly Estimated Tax Payments Explained

Why Quarterly Tax Payments Exist

Employed individuals have tax deducted from their salary before they receive it. Self-employed people, business owners, and investors don't have this automatic withholding - they receive their income gross and are responsible for calculating and paying their own tax. Without any mechanism to collect tax during the year, the government would have to wait until the annual filing deadline to receive revenue - and individuals would face a single, potentially enormous tax bill for which they may not have saved. Quarterly estimated tax payments solve this by spreading the liability across the year, which is better for tax authorities and, if managed properly, better for taxpayers too.

Who Needs to Make Quarterly Payments?

In the US, anyone who expects to owe at least $1,000 in federal tax after withholding is generally required to make quarterly estimated payments. This includes sole proprietors, freelancers, partners in partnerships, S-corporation shareholders, and anyone with significant investment income. In the UK, the equivalent mechanism is "payments on account" under Self Assessment, which applies when your Self Assessment tax bill exceeds £1,000. Most self-employed people with meaningful income will fall within these thresholds.

Related reading: self-employed tax: what you need to know.

US Quarterly Payment Deadlines

In the US, estimated tax payments are due four times a year:

• Q1: April 15 (covering January 1 to March 31)
• Q2: June 15 (covering April 1 to May 31)
• Q3: September 15 (covering June 1 to August 31)
• Q4: January 15 of the following year (covering September 1 to December 31)

Note the slightly unusual Q2 period (only two months) and Q4 deadline (in the following calendar year). These dates apply to federal taxes - state estimated tax deadlines vary by state and may differ from the federal schedule.

How to Calculate Your Quarterly Payment Amount

There are two safe-harbour methods for calculating US estimated payments that protect you from underpayment penalties:

1. Prior year method: Pay 100% of your prior year's total tax liability (or 110% if your prior year AGI exceeded $150,000), divided into four equal quarterly payments. This method is predictable and simple - you know exactly what to pay regardless of how the current year is going.
2. Current year method: Estimate your current year's income and expenses and pay 90% of the estimated tax liability in four quarterly instalments. This is more accurate if your income is significantly lower than last year, but requires active forecasting each quarter.

Many self-employed people use the prior year method for simplicity and switch to current-year estimates if their income changes significantly. Your tax software or accountant can calculate the optimal approach for your situation.

UK Payments on Account

In the UK, payments on account are calculated differently. HMRC sets each payment at 50% of your previous year's Self Assessment tax bill. Two payments are required: 31 January (alongside your return for the previous year) and 31 July. If your actual tax liability for the current year turns out to be lower than the payments you made, you receive a balancing refund. If it's higher, you pay a balancing payment the following January. You can apply to reduce payments on account if you expect your income to be lower than the prior year - but be cautious about reducing them too aggressively, as HMRC charges interest on any shortfall.

Setting Aside Money Throughout the Year

The practical key to managing estimated tax payments without stress is setting aside money as you earn it. A dedicated tax savings account - separate from your operating account - where you transfer a fixed percentage of every payment you receive removes the decision-making burden and ensures the money is available when due. The right percentage depends on your income level and applicable rates, but a starting point of 25–30% of gross income for most self-employed people in the 20–25% tax bracket is a reasonable default. Review and adjust quarterly.

How Note.now Makes This Easy

Note.now tracks your income and expenses in real time and generates a running estimate of your tax liability so you know whether you're setting aside enough. Quarterly summary reports give you the information you need to make accurate estimated payments. See also: how to prepare for tax season and managing sales tax in Note.now. Start your free account today.