For most of my life, I had absolutely no idea what estimated quarterly taxes were.

And why would I?

Throughout medical school, residency, and eventually as an employed attending physician, essentially all of my income came through a W-2. I got a paycheck. Taxes disappeared from that paycheck before the money ever reached my bank account. Then, once a year, we filed a tax return and figured out whether we owed a little more or got some money back.

That was basically the extent of my understanding. Then, in 2021, I started in earnest developing side gigs and businesses that generated 1099 income. Suddenly, nobody was automatically taking taxes out of the money I earned.

That is when estimated quarterly taxes entered my financial vocabulary after they surprised me the first time I owed them. Today, I make estimated tax payments throughout the year based on calculations and projections from my tax advisor. It has become a routine part of managing our finances. But I also know how confusing the concept can seem when you first encounter it.

So let's simplify estimated quarterly taxes by answering three questions:

1. Who needs to pay estimated taxes?
2. When do you need to pay them?
3. How do you figure out how much to pay?

Why do estimated quarterly taxes exist?

The first thing to understand is that the United States essentially operates a pay-as-you-go income tax system.

The IRS does not really want you earning money from January through December and then paying all of the associated taxes the following April. Instead, taxes generally need to be paid as income is earned throughout the year.

For most W-2 employees, this happens automatically. Your employer calculates federal income tax withholding and takes that money out of each paycheck. Depending on your circumstances, other taxes are withheld as well. You don't really feel like you are making estimated tax payments because you aren't. Your employer is handling the withholding for you.

But things change when you earn income that does not have taxes automatically withheld.

According to the IRS guidance on estimated taxes, estimated payments are commonly used for income from self-employment, interest, dividends, rents, and other sources without sufficient withholding. For physicians, the most obvious example is 1099 income.

Who has to pay estimated quarterly taxes?

The rule is not simply: W-2 employee = no quarterly taxes, 1099 worker = quarterly taxes. This is directionally useful, but the actual rule is more nuanced.

In general, the IRS says that you need to make estimated payments if you expect to owe at least $1,000 in federal tax for the year after subtracting withholding and refundable credits, and your withholding and refundable credits will be less than the required amount under IRS rules.

That means a physician earning only W-2 income may not need estimated payments because sufficient taxes are already being withheld from each paycheck. Meanwhile, someone earning substantial 1099 income often does. But you can also be both.

That is exactly the situation many physicians find themselves in.

You might earn $400,000 from your employed physician job and another $50,000 from expert witness work, consulting, medical surveys, speaking, or another physician side gig.

Your W-2 taxes are being withheld. Your side gig taxes probably aren't. Now you have to account for that additional tax liability somehow.

My introduction to quarterly estimated taxes

This was my situation as my financial life became more complicated.

Initially, I was simply an employed physician. Then The Prudent Plastic Surgeon began generating income. We started investing in real estate. Other business and side gig income followed.

All of a sudden, my tax situation looked very different.

I had spent years learning how to become a plastic surgeon. Nobody ever sat me down and explained that if I started making meaningful income outside of my W-2 job, I might need to proactively send money to the IRS four times per year. It was another example of something that seems obvious once you understand it but isn't obvious at all beforehand.

Today, my tax advisor estimates our expected tax liability and tells us how much to pay each quarter. I make the payments. And we adjust as our income and tax situation evolve throughout the year.

This is also one reason that, as your financial life becomes more complex, I think there can be significant value in working with a good tax professional. I discuss this more in my post about my personal tax plan.

When are quarterly estimated taxes due?

Here's another confusing part.

“Quarterly” makes it sound like you simply pay every three months.

Not exactly.

For most calendar-year taxpayers, the IRS divides estimated taxes into four payment periods. The standard deadlines are:

• April 15
• June 15
• September 15
• January 15 of the following year

If one of those dates falls on a weekend or legal holiday, the deadline generally moves to the next business day. You can always confirm the current deadlines using the IRS estimated tax guidance.

The important point is not necessarily memorizing the dates. Put them in your calendar. Better yet, make estimated taxes part of your financial system.

Because failing to pay enough throughout the year can potentially result in an underpayment penalty.

How much should you pay?

This is the big question.

And unfortunately, the answer is not simply, “Take your 1099 income and multiply it by X%.”

Your actual tax liability depends on your entire financial picture, including income, deductions, credits, filing status, business expenses, self-employment taxes, investment income, and other factors.

There are essentially two broad approaches.

Option #1: Estimate your current year's taxes

You can project your income, deductions, credits, and taxes for the current year and make payments based on that estimate.

The IRS provides Form 1040-ES specifically to help taxpayers calculate estimated payments.

The goal is to pay enough throughout the year that you are not significantly underpaid when tax season arrives. But there is an obvious challenge. Income isn't always predictable.

Maybe your consulting business takes off. Maybe you do far more expert witness work than expected. Or maybe your business income drops. Maybe you realize a large capital gain.

Your estimate can change.

Fortunately, you aren't necessarily locked into the same calculation all year. The IRS specifically notes that taxpayers can recalculate estimated payments as expected income changes.

Option #2: Use the safe harbor rules

This is where things get particularly useful for high-income physicians.

Generally, you can avoid an estimated tax underpayment penalty if you pay at least 90% of the tax owed for the current year or 100% of the prior year's tax liability, assuming the applicable requirements are met.

However, there is an important wrinkle for high earners.

If your prior-year adjusted gross income was greater than $150,000, or $75,000 if married filing separately, the prior-year safe harbor generally increases from 100% to 110%.

That means many physicians using the prior-year safe harbor are really thinking about 110% of the previous year's tax liability, not 100%.

For example, imagine your total federal tax liability last year was $100,000 and your income puts you above the IRS threshold. Your prior-year safe-harbor target would generally be $110,000. But that does not necessarily mean writing four $27,500 checks.

Remember, taxes already withheld from your W-2 paycheck count toward the taxes you've paid. Your estimated payments are filling the gap between what is being withheld and what you need to pay.

This is exactly where individualized calculations become important.

W-2 physicians with side gigs have another option

There is another strategy worth mentioning.

If you have substantial W-2 income plus some 1099 income, estimated quarterly payments are not necessarily the only way to cover the additional tax liability.

You may be able to increase the withholding from your W-2 paycheck instead.

That can sometimes be administratively simpler than making separate estimated payments. The goal is ultimately the same: making sure enough tax is paid throughout the year.

Whether increased W-2 withholding or separate estimated payments makes more sense depends on your individual circumstances.

Don't forget self-employment tax

Another mistake new 1099 earners make is thinking only about federal income tax.

If you have net earnings from self-employment, you may also owe self-employment taxes covering Social Security and Medicare. Estimated tax payments can account for both income tax and self-employment tax.

That means earning $50,000 of 1099 income does not necessarily mean you can simply look at your marginal federal income tax bracket, multiply, and call it a day.

This is another reason why I prefer having my tax advisor actually calculate our estimated payments rather than guessing.

And it reinforces a broader lesson that I learned as I became a business owner: making $1 of W-2 income and $1 of business income can have very different implications for taxes and financial planning.

I've written before about some of the opportunities available to W-2 physicians looking to lower their taxes and about maximizing legitimate physician tax deductions. The important word there is legitimate. Tax planning is about understanding and following the rules intelligently, not inventing deductions or trying to avoid taxes you legally owe.

What happens if you don't pay enough?

There are two potential problems.

The first is an underpayment penalty. Because federal income taxes are pay-as-you-go, the IRS can assess a penalty when you fail to pay enough tax during the year or pay it too late, even in some situations where you ultimately receive a refund.

The second problem is much less technical but potentially more painful. You get a gigantic tax bill. Imagine earning an additional $100,000 from a side business and spending or investing all of it as though every dollar belonged to you. Then April arrives. Unfortunately, some of that money was always going to belong to the government. Now you have to figure out where to find it.

Quarterly payments help prevent that problem by forcing you to account for your tax liability as you earn the income.

Estimated taxes are another financial system

When I started earning 1099 income, estimated quarterly taxes felt like another annoying financial complication. Now I barely think about them.

Our tax advisor reviews our situation and calculates what we should pay. We make the payment. If our income changes meaningfully, the estimates can be adjusted. That's it. And this really mirrors so many other areas of personal finance.

Something feels complicated when you encounter it for the first time. You learn how it works. You create a system. Eventually, it becomes boring. And boring is usually pretty good when it comes to money.

If you earn exclusively W-2 income and your withholding is appropriate, estimated quarterly taxes may never become a major part of your financial life.

But if you are a physician starting a side gig, receiving 1099 income, building a business, or otherwise earning meaningful income without withholding, estimated taxes are something you need to understand.

You don't need to become a CPA.

You just need to know when the rules apply to you, make sure enough money is being paid throughout the year, and get professional help when your situation becomes complicated enough to warrant it.

Because the worst time to learn about estimated quarterly taxes is when your accountant tells you how much you owe in April.

For more physician specific tax resources, check out these posts:

• Doctors Pay Too Much in Taxes. Here’s What to Do About It.
• How to Use the Augusta Rule to Lower Your Taxes
• Should Doctors Invest in Real Estate Just for the Taxes?
• 5 Ways W2 Physicians Can Lower Their Taxes

What do you think? Do you pay estimated quarterly taxes? How do you figure them out? Have you ever made any mistakes with them? What were they? Let me know in the comments below!