Estimated tax payments are quarterly payments made by taxpayers who have income but no tax withholdings during the year.
Self-employed taxpayers, people with investment income, and people with a large amount of other income may need to make estimated tax payments.
Compare this to an employee who has wages from a job. Taxes are withheld from those wages, so a taxpayer in that situation likely won’t need to worry about estimated tax payments.
When that employee files their tax return, the withholding helps cover the tax owed, often generating a refund or at the very least, lessening the amount of additional tax the taxpayer has to shell out.
But someone who’s self-employed doesn’t have “wages” and thus has no withholdings. Estimated tax payments are a way of cushioning the blow at tax time.
John is self-employed. His income for the year results in a tax liability of $15,000. Since John has no “wages” for withholding to be taken from, he has two choices: 1) come up with $15,000 at tax time, or 2) make estimated tax payments to cover his tax liability and lessen the amount that he has to shell out at once.