Since most people are paid by salary, their employer withholds income tax. But for taxpayers who are either self-employed or have substantial non-wage income, there’s usually no automatic withholding method. Examples of non-wage income include interest, dividends, alimony, unemployment compensation and the taxable part of Social Security benefits. For these taxpayers, it will be necessary to pay quarterly estimated tax payments. You’ll generally need to make estimated quarterly tax payments if you will owe taxes of $1,000 or more after subtracting your tax withholding.
Paying 100% of the taxes you owed in the previous year is referred to as the safe harbor rule. Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year. If your income is more than $150,000 per year, then you’re required to pay 110% of what you paid in taxes last year. If you live in a state that charges income tax, you may also need to set up quarterly state tax payments.