How Estimated Tax Payments Work

Who Pays Estimated Taxes?

People who earn most or all of their money by working as an employee of a business or entity generally aren't required to pay estimated taxes because their employer withholds a certain portion of their pay for tax purposes. The estimated tax requirement largely kicks in for nontraditional employees, like freelancers and those who are classified as independent contractors based on the circumstances of their employment.

One of the biggest groups of people who are obligated to pay quarterly estimated taxes are those who are self-employed. That includes people who run their own businesses. It also covers those who work for someone else and are considered independent contractors rather than employees. If the person or business that you work for sends you a Form-1099 at the end of the year, you're being categorized as an independent contractor. That decision can be appealed to the IRS [source: IRS].

The determination of whether a person is an employee or a contractor is a somewhat complicated legal issue that centers on how much autonomy the worker has over completing day-to-day tasks. Even workers with the same job title may fall into different classifications, based on their individual employment situations. Employers, the IRS and courts generally look at whether the employer controls when, how and where the worker completes job tasks. The more control the employer wields, the more likely the worker is to be considered an employee. Other factors include whether the employer provides tools and supplies, as well as whether it provides benefits like insurance, a pension and vacation pay. If the answer to either question is "yes" the worker may very well be an employee [source: IRS].

Other people who may need to pay estimated taxes over the year include those who make significant money through investments, alimony or spousal support, gambling winnings, bonuses or other prizes.