The internal revenue service wants you to pay estimated taxes on an as-you-go basis. If you receive wages, taxes are withheld as the wages are earned. However, for other types of income - such as self-employment income, interest, dividends, capital gains, etc. - there is no employer to withhold taxes, but the internal revenue service still wants to collect taxes on an as-you-go basis. Thus, for these types of income, you may have to make "estimated tax payments" or be subject to estimated tax penalties. Estimated taxes must be made in four equal installments, payable on April 15, June 15, September 15, and January 15.

The estimated taxes "penalty" is something of a misnomer, in that the penalty is really just interest. Calculation of the penalty is based the internal revenue service underpayment interest rate times your estimated tax underpayment.

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Avoiding the penalty
Delinquency penalties

Avoiding the penalty

You generally can avoid estimated tax penalties if any of the following exceptions apply: