Do I Need to Pay Quarterly Estimated Taxes? A Guide for NYC Self-Employed

If you are self-employed or have income outside of a regular paycheck, quarterly taxes are probably required. Here is everything you need to know.

Disclaimer: This article is for general informational purposes only and does not constitute professional tax or legal advice. Tax laws change frequently and vary by individual circumstance. Always consult a qualified tax professional before making financial decisions.

Quarterly estimated taxes are one of the most confusing aspects of self-employment, and they trip up a lot of people who are new to working for themselves. The short answer to whether you need to pay them: if you expect to owe $1,000 or more in federal taxes and you do not have an employer withholding on your behalf, yes, you almost certainly do.

The reason the system works this way is that the United States has a pay-as-you-go tax system. When you are an employee, your employer withholds taxes from every paycheck so you are constantly paying throughout the year. When you are self-employed, nobody does that for you. The IRS and New York State do not want to wait until April to collect — they want payments throughout the year.

The quarterly deadlines for federal taxes are April 15, June 16, September 15, and January 15 of the following year. New York State follows the same schedule. New York City taxes are paid through your state return so there is no separate NYC quarterly payment.

Missing these deadlines or underpaying results in an underpayment penalty. It is not a devastating penalty, but it is an annoying and completely avoidable cost. Many people think they can just pay everything in April — technically you can, but you will pay a penalty for not making the quarterly payments.

The question most people ask next is: how do I know how much to pay each quarter? There are two approaches.

The simpler approach is the safe harbor method. If you pay at least 100% of what you owed in taxes last year, divided into four equal quarterly payments, you will not owe an underpayment penalty regardless of what you end up owing for the current year. If your income was higher last year than it will be this year, this method might actually result in an overpayment and a refund, which is fine.

The more precise approach is to estimate your actual current-year income each quarter and calculate your expected tax liability based on that. This requires more work but results in more accurate payments.

For a New York City freelancer or small business owner, the practical advice is this: open a separate savings account and move 25% to 30% of every payment you receive into it as you go. This is your tax account. When quarterly payments are due, you have the money sitting there. You never have the painful experience of owing tens of thousands of dollars you have already spent.

The IRS Form 1040-ES walks you through calculating your estimated payments. New York State uses Form IT-2105. If your income varies significantly from quarter to quarter, which is common for freelancers and business owners, working with a tax professional to calculate each quarter's payment based on actual income earned that period is worth doing.

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