How to Calculate Estimated Tax Payments — Step-by-Step
Calculating estimated tax payments isn't as complicated as it looks — but getting it wrong means either underpayment penalties or lending the IRS too much money interest-free. Here's the step-by-step calculation, with a worked example for a typical freelancer.
Run the numbers automatically with the Quarterly Tax Calculator.
The Basic Formula
Estimated Tax = (Expected Income Tax + Self-Employment Tax) – Withholding – Credits
Quarterly Payment = Estimated Tax ÷ 4
Step-by-Step Calculation (2026 Example)
Starting Point: Income
| Income Source | Annual Amount |
|---|---|
| Freelance income (1099) | $90,000 |
| W-2 salary | $0 |
| Investment income | $2,000 |
| Total gross income | $92,000 |
Step 1: Calculate Self-Employment Tax
Self-employment tax (Social Security + Medicare) applies to freelance/business income:
| Line | Calculation | Amount |
|---|---|---|
| Net self-employment income | $90,000 | $90,000 |
| × 92.35% (SE tax base) | $90,000 × 0.9235 | $83,115 |
| SE tax rate | 15.3% | |
| Self-employment tax | $83,115 × 0.153 | $12,717 |
| Deductible half of SE tax | $12,717 ÷ 2 | $6,359 |
Step 2: Calculate Adjusted Gross Income
| Line | Amount |
|---|---|
| Gross income | $92,000 |
| Minus: Deductible half of SE tax | -$6,359 |
| Minus: SEP IRA or Solo 401(k) contribution | -$0 (adjust if applicable) |
| Adjusted Gross Income | $85,641 |
Step 3: Calculate Taxable Income
| Line | Amount |
|---|---|
| AGI | $85,641 |
| Minus: Standard deduction (Single, 2026) | -$15,700 |
| Taxable income | $69,941 |
Step 4: Calculate Federal Income Tax
Using 2026 brackets (Single):
| Bracket | Rate | Tax |
|---|---|---|
| $0 – $11,925 | 10% | $1,193 |
| $11,926 – $48,475 | 12% | $4,386 |
| $48,476 – $69,941 | 22% | $4,722 |
| Total income tax | $10,301 |
Step 5: Total Tax and Quarterly Payment
| Line | Amount |
|---|---|
| Federal income tax | $10,301 |
| Self-employment tax | $12,717 |
| Total estimated tax | $23,018 |
| Minus: Withholding (W-2) | -$0 |
| Minus: Credits | -$0 |
| Amount owed through estimated payments | $23,018 |
| Quarterly payment | $5,755 |
The Annualized Installment Method
If your income isn't evenly spread (common for seasonal businesses, realtors, or freelancers), the standard "divide by 4" method can create cash flow problems. The annualized installment method lets you base each quarterly payment on the income you actually earned in that period.
| Quarter | Income Earned | Annualized Income | Tax on Annualized | Cumulative Required | This Quarter's Payment |
|---|---|---|---|---|---|
| Q1 | $15,000 | $60,000 | $14,500 | $3,625 | $3,625 |
| Q2 | $25,000 | $80,000 | $20,200 | $10,100 | $6,475 |
| Q3 | $30,000 | $93,333 | $24,000 | $18,000 | $7,900 |
| Q4 | $20,000 | $90,000 | $23,000 | $23,000 | $5,000 |
This requires filing Form 2210 Schedule AI with your annual return, but it prevents you from overpaying in quarters where income is low.
Common Mistakes
| Mistake | Fix |
|---|---|
| Forgetting self-employment tax | SE tax is 15.3% — often larger than income tax for freelancers |
| Not deducting half of SE tax from AGI | This reduces your income tax |
| Using last year's tax brackets | Brackets adjust annually for inflation |
| Not accounting for business deductions | Home office, equipment, mileage all reduce taxable income |
| Paying all at once in Q4 | Penalties accrue per quarter — pay throughout the year |
For the complete guide, see Quarterly Estimated Tax Payments — Complete Guide. For avoiding penalties, read Estimated Tax Penalty — How to Avoid It. And for the simplest penalty-avoidance method, check Safe Harbor Rule.
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