How Much is the Penalty for Not Paying Estimated Taxes?

Tax Season doesn’t just come once a year for self-employed workers. Instead, many freelancers pay their taxes four times a year. These are referred to as estimated quarterly tax payments.

For new freelancers, this change in payment pattern can come as a surprise. But even for seasoned self-employed workers, taking care of 1099 taxes can be a challenge, and missing a deadline just happens sometimes.

Unfortunately, missed estimated payments can come with penalties from the IRS. This calculator is here to help you figure out if you owe any penalties and how much they’ll cost. We’ll also go over tips for potentially reducing your penalty, and how to avoid them in the future.

First, let's cover who’s responsible for paying quarterly taxes.

Who pays estimated quarterly taxes?

If you’re a freelancer and expect to owe at least $1,000 in taxes, you likely have to pay estimated taxes in quarterly installments throughout the year — instead of just paying once on the annual April 15th deadline.

This is because, unlike with W-2 jobs, self-employed people don’t have taxes withheld from their paychecks. So quarterly taxes are the freelancer version of traditional tax withholding.

Quarterly taxes are due on:

• April 15
• June 15
• September 15
• January 15 (the following year)

There are exceptions to this rule. To double-check which tax deadlines apply to you, check out Keeper’s guide to quarterly taxes.

What happens if you miss an estimated quarterly tax payment?

If you miss an estimated quarterly tax payment, you will likely receive a penalty from the IRS.

Here’s how the penalty works:

• When you miss a deadline, your penalty starts at 0.5% of the entire amount you owe
• The penalty increases for each additional month or part of a month your payment is late — with a cap of 25%
• Penalties include also interest, which the IRS updates the rates for every quarter

Another important penalty rule to keep in mind is that they’re based on your quarterly payments, not your yearly total.

Let’s say you owe $2,000 in taxes and you’re responsible for paying them in quarterly installments of $500. If you pay the full $2,000 by the end of the year, but you underpay one of the installments, you could still wind up facing penalties.

How to calculate your penalty for not paying estimated taxes

If you’re expected to pay quarterly taxes and miss a payment, there are a couple of ways to figure out how much you’ll owe in penalties, including just letting the IRS take care of it.

However, a more reliable option is to turn to a tool like Keeper's underpayment calculator which gives you a close estimate of your penalty in seconds. It’ll let you know how much you owe in seconds, and then you can keep reading to learn how to pay your penalty.

To illustrate how the calculator works, we’ll fill in the fields using an example: Robin is a freelance editor who lives in Massachusetts and also works as a part-time retail sales associate. 

Robin has missed all four estimated tax payments and has turned to Keeper’s calculator to get started on sorting out their late quarterly taxes by figuring out how much their penalty will cost.

Let’s get started.

1. Select your home state

Where you live will affect your penalty for underpayment of estimated taxes, and each state’s rules differ.

For instance, in our example, Robin lives in Massachusetts, where the state penalty is the same as the federal’s, plus four percentage points.

Keeper’s calculator will determine the state portion of your penalty for you. But if you’d like more information on how it’s calculated, head to the tax section of your state’s government website.

2. Choose your tax filing status

Your filing status determines your tax bill, so it also affects the cost of your penalty for missing a quarterly tax payment.

From the calculator’s dropdown menu, choose the filing status that applies to you:

• Single. If you only report your own income on your tax return. (This includes people who are married but file separately from their spouse.)
• Married filing jointly. If you and your spouse file one tax return for both your incomes.
• Head of household. If you only report your own income on your tax return, you live with qualifying dependents, and you’re responsible for paying at least half of your household’s costs.

For our example, Robin is a single tax filer.

3. Enter your expected annual self-employment income

If you have multiple jobs as a freelancer, gig worker, or independent contractor, enter the total income you earn from all of them in the calculator — after deducting business expenses.

Determining how much you expect to earn in the coming year can be challenging. You can look back on previous years to get an idea of what you’ll earn, however, self-employed people know that 1099 income can fluctuate from one year to another.

Keep in mind that the IRS gives quarterly filers a 10% buffer in case you’re slightly off. Meaning if you under or overestimate how much your annual self-employment income will be by up to 10%, you won’t face a penalty.

That said, it’s always better to overpay than underpay. Overpayments will come back to you as a tax refund. Underpayments, as we know, can result in penalties.

In our example, Robin is expecting to earn $30,000 after deducting business expenses next year as a freelance editor.

4. Input your expected annual W-2 income

Finally, if you have a W-2 job in addition to your 1099 work, enter your expected W-2 income in the calculator’s last field. 

This is an easier estimate to calculate because W-2 workers are typically paid a set annual or hourly amount. 

Robin works part-time as a retail sales associate. In the coming year, they expect to earn $20,000.

Understanding your estimated tax underpayment penalties

After hitting “calculate my penalty” on the calculator, Robin learns they owe about $383 in penalties. ($329 in IRS penalties and $54 in state penalties.)

The calculator determines penalty results based on:

• The amount of the underpayment
• The period when the underpayment was due and underpaid
• The IRS’ quarterly interest rate for underpayments
• Approximations of State penalty rules

In Robin’s case, she owed about $7,000 in total on taxes (Federal and MA). At 9% interest rates, that’s about $600 in penalties. However, since the payments were meant to be interspersed throughout the year and not all at once at the beginning, the actual penalty is lower – around $380.

How to avoid penalties for missed estimated tax payments

Now that you’ve got an idea of how much your penalties are, let’s focus on what to do next.

Pay what you can right away

Underpayment penalties increase over time and also build interest. Even if you can’t pay the full amount of your quarterly taxes, the sooner you make a payment, the less you’ll end up owing.

Head here to make a payment to the IRS.

Check if you qualify to have your penalties waived

Even the IRS understands that life can be unpredictable and sometimes accommodations need to be made.

If you missed a quarterly tax payment due to “just cause,” the IRS might grant you a penalty waiver. This includes:

• If you became disabled
• If you are at least 62 and have retired
• If you experienced a casualty, disaster, or other "unusual circumstance"
• If you can claim the First Time Penalty Abatement Waiver

To learn more about who’s eligible to request a penalty waiver, and how to do so, check out Keeper’s in-depth guide to navigating missed quarterly tax payments.

Let’s also cover a few ways to avoid missing future quarterly tax deadlines.

Rely on a service like Keeper

Learning the tax ropes as a freelancer can be overwhelming. But you don’t have to do it all on your own. A tax app like Keeper can help you stay on top of quarterly taxes by:

• Ensuring you know all your relevant tax deadlines
• Helping you calculate how much you owe in quarterly taxes in less than a minute
• Giving you step-by-step instructions on how to pay your quarterly taxes (or you can also file your taxes right in the Keeper app!)
• Making sure you save as much money on your taxes as possible through tax write-offs

Use the annualized income installment method for unpredictable income

When it comes to paying quarterly taxes, freelancers typically estimate how much they’ll owe in taxes for the coming year and then divide that into four equal payments.

However, many freelancers’ incomes fluctuate throughout the year. In this case, they can use the annualized income installment method, which allows freelancers to make smaller quarterly payments when they earn less — without facing penalties.

To learn more about the method and whether it’s right for you, read Keeper's guide to the annualized income installment method.

Finally, remember that you’re not alone in missing tax deadlines. If it wasn’t so common, resources like this calculator wouldn’t exist. The best thing you can do is take a deep breath and make a plan for how to tackle the penalty — whether through paying what you can or applying for a payment plan. And if you need a hand, reach out to the team at Keeper for support.