Missed a Quarterly Tax Payment? Here Are the Penalties (And How to Get Out of Them)

by
Justin W. Jones, EA, JD
Updated 
September 21, 2022
March 4, 2022
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If you're a freelancer, independent contractor, or self-employed worker, Tax Day isn't just a once-a-year headache. Depending on your self-employment income, you could be on the hook for estimated tax payments four times a year, on:

  • April 15
  • June 15
  • September 15
  • January 15 of the next year

The problem is, not everyone knows about these quarterly taxes. And even if they're on your radar, it can be easy to skip a deadline.

Never fear. In this article, we'll go over everything you need to know about missing a quarterly estimated tax payment — including what the penalties are and how to potentially get out of them.

But first, let's talk about who needs to pay them in the first place.

Contents

Who has to make quarterly estimated tax payments?

Self-employed individuals will need to make quarterly estimated tax payments if they expect to owe at least $1,000 in taxes. 

Not all freelancers and independent contractors actually have to pay quarterly. If you freelance part-time or as a side hustle, you could be in the clear.

Not sure if that applies to you? Find out if you should even be worrying about estimated payments using our free estimated tax calculator. (We'll walk through how to crunch the numbers later!)

Why are quarterly taxes required?

Long story short, the US has a pay-as-you-go tax system. 

That's why employers are responsible for withholding taxes from their employees' paychecks and depositing those funds with the IRS. If you're self-employed and have enough taxable income, your quarterly payments essentially take the place of that withholding.

The payments you make four times a year will cover both your income taxes and your self-employment taxes, which W-2 employees don't have to deal with on their own. (To learn more, check out our beginner's guide to self-employment tax!)

Don't relish the idea of giving the IRS your money — let alone four times a year? Good news: You can lower your tax bill by taking business write-offs! That's true whether you're paying quarterly or annually.

To make sure you never miss a write-off, use Keeper Tax. Our app will automatically scan your accounts and help you deduct anything you buy for work, from gas for your car to software for your laptop. 

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Does anyone else have to pay quarterly taxes?

Technically, self-employed people aren't the only ones who have to pay taxes in installments.

Quarterly payments also apply to other taxpayers who earn money that isn't subject to withholding. That can happen with a few different scenarios, including with:

  • Business earnings
  • Dividends
  • Gains from the sale of assets, like stock
  • Interest
  • Taxable alimony

For the most part, though, estimated tax payments are associated with freelancers and small business owners. That’s who we'll be focusing on in this article.

How to calculate your quarterly tax payments

Our free quarterly tax calculator is the easiest way to figure out whether you should be making estimated payments. It'll even tell you how much to set aside for each installment.

Results from a quarterly tax calculator showing a California taxpayer's tax bill, due on April 15, 2022

If you'd rather do the math by hand, here's how it works.

Add up how much tax you owe for the year, including both your income tax and self-employment tax. Then, divide that number by four to figure out how much you're paying per quarter. 

Calculating your estimated taxes with Form 1040-ES

The IRS offers a worksheet you can use to walk through the calculations. You can find it on page 8 of Form 1040-ES, "Estimated Tax for Individuals."

Part of a blank 2022 estimated tax worksheet, from Form 1040-ES

You don't actually have to submit this worksheet when you pay your estimated taxes. 

For detailed instructions, including all your options for paying, take a look at our guide on how to file quarterly taxes!

What to do if you skipped an estimated tax payment

The IRS expects you to pay by the deadline. If you miss one, make the quarterly tax payment as soon as you can.

Some people might think, “Well, I already missed this quarterly payment. I’ll just wait until next quarter to make it up.”

Unfortunately, that's a big mistake.

Why? Because the underpayment tax penalty is worked out by looking:

  • How much you you owed 
  • How long it took before you finally paid

In other words, you’ll pay more the longer you wait.

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What if you can't pay the full amount due?

Say you know there’s an estimated tax due date coming up, but you just can't scrounge up the funds.

In that case, pay as much as you can by the deadline instead of waiting till you can pay the whole thing. Even partial payments will help reduce the penalty amounts you'll owe. We'll get into that next!

What does the tax underpayment penalty for quarterly taxes work?

Once a due date has passed, the IRS will typically dock 0.5% of the entire amount you owe. 

For each partial or full month you don’t pay the tax in full, the penalty increases. It's capped at 25%.

📈 Penalties include interest, which can change every quarter

What we listed above are rules of thumb that will help you get a sense of your potential penalty. But the actual penalty will fluctuate.

That's because it includes interest for missed payments, and the interest rate can change from quarter to quarter.

🗓️ Penalties are based on the quarter — not the year

It's entirely possible to pay the correct amount for the year, but still get penalized for underpayment in a specific quarter.

To take things further, you can even overpay your quarterly taxes for the year as a whole and still get penalized, as long as you were short for a quarter.

Here’s an example of this unfortunate rule at work. Say you skipped the June 15 payment, but pay extra in September to make up for it. You'll still have to pay a penalty for the estimated payment you skipped in June.

⛵ Penalties can go away thanks to safe harbor rules

Sometimes, these penalties won’t actually be enforced. Safe harbor rules can protect you from having to pay them. Here are the conditions you’ll have to meet, based on your business’s adjustable gross income (AGI):

AGI You won't have to pay penalties if...
$150,000 or less You met 100% of last year’s tax liability, in equal payments across all four quarters
More than $150,000 You met 110% of last year’s tax liability, in equal payments across all four quarters

As you can see, these safe harbor rules are based on how much you owed the previous year. 

That can create some annoyances if you earn a lot more in the current year. You won't be on the hook for any penalties, but that doesn’t mean the extra is tax-free — you’ll still have to pay tax on it when you file your annual return.

For example, say your gross income for the prior year was $50,000, and it jumped up to $100,000 for the current year.

You can make your quarterly tax payments based on the $75,000, and you won’t be penalized for it. But you will need to pay tax for the extra $25,000 as a lump sum on April 15.

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Finding out how much penalty you owe

If you're been missing payment deadlines, it's surprisingly complicated to figure out how much penalty you owe. After all, a number of different factors go into this, including how much you paid, how many days you were late, and how much interest you owe.

That's why most people aren't required to figure this out by themselves.

🧾 Having the IRS figure out your penalty

For most taxpayers on the hook for penalties, the IRS will calculate how much you owe.

When you file your taxes, just leave the relevant box blank on your Form 1040. (That's box 38, for "Estimated tax penalty."

Part of a blank Form 1040, with line 38 — for estimated tax penalty — circled in blue

The IRS will respond by sending you a bill.

🧮 Figuring out your penalty on your own

A small number of taxpayers don't have the option of waiting for the IRS to calculate their penalty. They have to do it by themselves.

This only applies to you under three very specific circumstances:

  • ✅ Your income varied a lot throughout the year, and you want to use the annualized income installment method to reduce your penalty -- more on this later!
  • ✅ You're applying to waive part of your penalty (as opposed to the whole thing) —  more on penalty waivers below as well!
  • ✅ You had tax withholding, and reporting the actual withholding dates results in a lower tax penalty than the default method of averaging it out over all four quarters.

The third one is pretty uncommon. But it could happen if your employer did something other than paying splitting your withholding into four equal chunks — like paying all of it in the first two quarters.)

If you fall into any of those three categories, you'll have to calculate your penalty yourself. Use the worksheet on Part III of Form 2210, which is for "Underpayment of Estimated Tax by Individuals, Estates, and Trusts."

The first part of Part III on a blank Form 2210, for calculating tax penalty

This worksheet will walk you through the whole computation. (Be sure to have your instructions on hand!)

How to get out of tax underpayment penalties

​No one likes dealing with underpayment penalties. But in some cases, they're downright unfair. 

Even the IRS recognizes this. That's why they've come up with a couple of ways to get out of penalties.

The first is for self-employed people with highly variable income. The second is for taxpayers dealing with special circumstances that prevented them from paying on time.

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Avoiding penalties if your income was uneven

People who work regular W-2 jobs can often expect the same paycheck every time. For gig workers, sole proprietors, and business owners, though, there's no such guarantee. 

Say you run a seasonal business — selling at outdoor markets when the weather's nice and closing up once winter hits. Or maybe your side gig is busiest during a particular time of year. You might even just be dealing with a rough couple of months.

No matter what the reason, it's not that unusual for self-employed people to earn a lot of money in one quarter and a little the next. That can make estimated tax payments a source of stress.

Enter the annualized income installment method. 

What is the annualized income installment method?

The annualized income installment method is a different way of splitting up estimated tax payments for people whose income changes throughout the year.

Typically, quarterly tax payments are made using the regular installment method: splitting up your estimated tax liability into four equal pieces. 

The annualized income installment method, in contrast, lets freelancers with variable income pay more tax less when they earn less — without any penalties.

Figuring out your annualized income installments with Schedule AI

​If you use this method, you'll figure out how much you're paying per quarter by using Schedule AI. You can find it on page 3 of form 2210.

The top part of a blank Schedule AI, for the annualized income installment method

It's a pretty complicated worksheet — you'll want to keep the instructions on hand. We'll go over the basics behind it next.

How annualized income installments work

As you can see on Schedule AI, the annualized income installment method involves splitting your year into four chunks:

  • 🌒 January 1 to March 31 (a)
  • 🌓 January 1 to May 31 (b)
  • 🌔 January 1 to August 31 (c)
  • 🌕 January 1 to December 31 (d)

These chunks or periods actually overlap. The first period is included in the second period, and so on. The fourth and final period covers the entire year.

In line 2 of Schedule AI, you'll see some numbers pre-filled for you in a different font.

Part of a blank Schedule AI, with the annualization amounts in box 4 circled in blue

These are called "annualization amounts.” That’s a mouthful, but it essentially means you’ll use them to find your annualized income for the period.

The annualization amounts are:

  • 4 for period (a)
  • 2.4 for period (b)
  • 1.5 for period (c)
  • 1 for period (d)

To use them, multiply your adjusted gross income (AGI) in each period by the right annualization amount. That’ll give you your "annualized income" for the period. The calculation is essentially asking, "If my income for the whole year looks like my income for this period, what would my total annual income be?"

As an example, pretend your AGI for period (a) was $12,000. Using the annualization amount for the period, 4, you’ll find that annualized income is $48,000: $12,000 times 4.

As you can guess, these annualization amounts represent how much of the year has passed by the end of each period.

The one for period (a) is 4 because the three months from January to March are one fourth of the year. In other words, you have to multiply your income for that period by 4 to stretch it out to the whole year. Meanwhile, the last annualization amount is just 1 because period (d) is the whole year.

Annualized income in action

How does this help people with fluctuating income? Let's talk through an example involving a seasonally fluctuating business. We'll simplify things a little — using your earnings instead of your AGI. But it should still help you understand the rationale behind this way of doing things.

Say you have an online business selling ski equipment. Naturally, your income depends a lot on how cold it is outside.

Graphic showing how a taxpayer who earns uneven income can annualize their income throughout the year

❄️ Period (a)

You have a strong beginning of the year, thanks to some great weather for hitting the slopes. From January to March — period (a) — your income is $20,000. Multiply that by the annualization amount for period (a), which is 4, and you can see you're on track to hit $80,000 for the year! 

🌱 Period (b)

Spring rolls around, and things slow down. From April to May, you only make $5,000. That means your total income from period (b) is $25,000. Multiply that by the right annualization amount (2.4), and your annualized income is now $60,000.

☀️ Period (c)

Summer hits, and business is even slower. Between June, July, and August, you earn $2,000. Now, your total  income in period (c) is $27,000, because ($20,000 + $5,000 + $2,000). Multiply that by 1.5, and you get $40,500 for your annualized income.

🌲 Period (d)

Once the weather gets colder, your business heats up again. From September till the end of the year, your shop makes $15,000. That means your total income for this period is $42,000. That’s $20,000 + $5,000 + $2,000 + $15,000. Because this final period covers the entire year, that’s also your actual annual income. Hence your annualization amount being 1.

All in all, your ski shop earns a lot less in the spring and summer. The annualized income installment method can help you pay less tax during the times when you need that money the most. And it does this by accounting for how the slow months impact your bottom line.

Getting underpayment penalties waived

People with fluctuating income aren't the only taxpayers who can get out of quarterly tax penalties. As we mentioned earlier, you can also apply to waive the underpayment penalty you owe.

Many people are surprised to learn this, but the IRS is actually fairly lenient with penalties, especially if you can demonstrate you’re on top of estimated payments in the current year.

In most cases, as long as you can prove that your underpayment was the result of a “reasonable cause” — such as a family death or medical emergency — you’ll probably get a pass.

What won’t be good enough is “willful neglect” — basically, intentionally ignoring the payment.

Who qualifies for a penalty waiver

The IRS is willing to waive underpayment penalties if you:

A couple of these are worth unpacking some more.

First, note that there are special rules for people who were affected by a federally recognized disaster. If that applies to you, the IRS will give you a waiver automatically — no need to file any forms.

Second, the First Time Penalty Abatement policy is for people who are either filing taxes for the first time, or dealing with their first penalty after three years without any. Basically, it’s a policy of leniency for people who aren’t very experienced with penalties.

Requesting a penalty waiver

To request your waiver, fill out Form 2210 and check the right box in Part II. (It's box A for full waivers and box B for partial waivers.)

Part II of a blank Form 2210, with boxes A and B circled in blue

You'll submit the form along with a statement explaining why you weren't able to make your payments during the specific time period you want a waiver for.

You'll also need some documentation for your reasons. Here are some examples of the proof you might attach, depending on why you’re asking for a waiver:

Reason for waiver Documentation
Disability Hospital records, disability insurance statements
Retirement Proof of retirement date, proof of age
Casualty or disaster Police reports, insurance company reports

Now that you’ve read this article, you’ll know what happens if you miss a quarterly estimated tax payment — and what you can do about it.

Bottom line: A skipped payment isn't the end of the world. Just make it for it as soon as you can! Your future self will thank you.

Justin W. Jones, EA, JD

Justin W. Jones, EA, JD

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Justin is an IRS Enrolled Agent, allowing him to represent taxpayers before the IRS. He loves helping freelancers and small business owners save on taxes. He is also an attorney and works part-time with the Keeper Tax team.

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