1. What is it about, anyway?

Folks who have regular W2 jobs and receive regular paychecks don't worry about these things. Their taxes are taken out of their paychecks. When they file their tax return next spring, they expect - and often receive - part of their previously withheld taxes back. This is called a tax refund, and it's very American to celebrate this "sudden windfall" and instantly spend it on something foolish. Yay!

The rest of us who run our own businesses and do not have any taxes withheld from anything do have a problem. When the year is over, and we have - hopefully - made some good money, the tax man comes knocking. Owing money to the IRS is not fun.

Amazingly, even if we manage to somehow pay the IRS on April 15th, the tax man is still unhappy and charges us some penalties. How come? Well, that is the topic of this post.

2. "Pay as you go" is what the IRS wants.

The IRS wants all of us to pay taxes evenly throughout the year, instead of making one large lump-sum payment on April 15th. They have two reasons:
- they get our money sooner and can spend it sooner
- most people won't have cash saved up for April 15th

With W2 jobs, regular payments to the IRS are forced: they simply intercept a portion of your earnings - before you see your paycheck. But when your income comes from your real estate business: commissions, rents, closings, note payments and so on - the IRS cannot (yet) intercept this money.

Instead, they came up with this rule: you must pre-pay your taxes in four quarterly payments, called estimated payments. Of course, being the government, they struggle even with the simplest of tasks: figuring out that quarterly normally means every 3 months. Nah, that would make too much sense. And the IRS hates nothing more than simplicity or common sense. Here's the prescribed "quarterly" schedule, per the IRS:
- April 15th
- June 15th
- September 15th
- January 15th

So, if you will owe the IRS $40,000 for the current year, you need to pay them $10,000 four times, on those 4 seemingly random dates.

Well, this immediately creates a bunch of questions, starting with these two:
- What if I don't?
- How do I know how much taxes I will owe if the year is not over yet?

3. What if you ignore these quarterly payments?

Have you been in a relationship, like, ever? What happens if you ignore your partner's demands? Some kind of punishment, at least in my experience. Yeah, you are in a relationship with the IRS. An abusive relationship, and you did not ask for it, but it's a relationship. And even death does not necessarily do you part. 

So, what's the punishment? They call it an estimated tax penalty. While the word they use is penalty, in reality it is calculated as interest. 

Let's say your tax liability is $40,000. You were supposed to pay it as four quarterly $10,000 payments, but you did not. Now you owe:
- 12 months of interest on the first $10,000 plus
- 9 months of interest on the next $10,000 plus
- 6 months of interest on the third $10,000 and PLUS
- 3 months of interest on the last $10,000.

The exact calculation is not 12/9/6/3, it is 12/10/7/3 due to their weird schedule, but you get an idea.

What's the interest rate? It varied from 3% to 12% over the last 30 years. As of January 2026, it is 7%. You might think of ignoring estimated payments as borrowing from the IRS at 7% rate. 

This may sound like an acceptable rate of borrowing, but remember: if you don't repay this "loan" on April 15th, things get much worse.

4. Fine, I will pay, but how much?

The trick is that you do not know how much taxes are due for the current year until your tax return is prepared. And by that time it is too late to make estimated payments. Classic Catch-22.

What does the IRS want, then? They want you to estimate your future tax liability. A better word would be guess. And if you guess wrong, they penalize you. Welcome to the casino.

5. So there is basically no way to avoid the penalty, even if I make quarterly payments?

There is a workaround, an official alternative to guessing. You take whatever taxes you owed last year. You multiply it by 110%. This becomes your pre-payment target for the current year. If you make this target number, you avoid the pesky penalty/interest. Whew.

Almost. Sorry, we have two gotchas:
- to completely avoid penalties, this target number needs to be split into 4 equal payments, made on the 4 prescribed dates
- you avoid penalties, but you may still owe more taxes on April 15th if your income this year grew significantly 

6. So, W2 people never have estimated taxes or estimated tax penalties?

They might - if they do not have enough taxes taken out of their paychecks. Here're three common scenarios when it happens:
- some people make mistakes when completing forms W-4 at a new job
- some people intentionally manipulate those forms in order to artificially bump their paychecks (this can get you in hot water)
- multiple job changes or holding multiple part-time jobs can result in not withholding enough taxes

If you have W2 payroll but end up with a large tax shortage - you may still face the same problem that entrepreneurs face. It is best solved by increasing your paycheck withholdings rather than by estimated payments, as illustrated below.

7. What if I (and my spouse) have both W2 income and business income?

The bad news is that you need to pre-pay taxes generated by your business, otherwise you will be penalized. The good news is that you have more flexibility on how to arrange these payments.

Example. You have a $100k W2 job. Your spouse makes $50k as a Realtor. Your combined tax liability is about $24k. You can pay the IRS one of these ways:
- $1,000 withholdings from each of your 24 paychecks
- no paychecks withholdings but four quarterly payments of $6k each
- $500 withholdings from each of your 24 paychecks ($12k total) PLUS four quarterly payments of $3k each (another $12k)
- any other combination of paychecks and estimated payments

It seems (to me) that increasing your paychecks withholdings to $1k each is the simplest approach. But it is 2026, and everybody has their own ideas about what is simple, what is fair or what is real. The show must go on.

8. What if I already missed some quarterly payment deadlines?

You may not be able to eliminate the penalty completely, unless you have a "backdoor" option to increase W2 withholdings. But you can still minimize this penalty if you start catching up ASAP. Or wait till they catch up with you. They will.