The U.S. tax system operates on a pay-as-you-earn basis, requiring taxes to be paid as income is received. For employees, employers typically manage this through withholding. However, for those without automatic withholding, such as the self-employed, estimated tax payments are necessary to fulfill this requirement. These payments cover not only federal income tax, but also self-employment taxes, which include Social Security and Medicare contributions.
Types of Income Subject to Estimated Taxes
Estimated taxes apply to a variety of income sources, including:
- Self-employment earnings
- Freelance and contract work
- Dividends
- Capital gains
- Interest
- Royalties
- Rental income
- Taxable unemployment benefits
- Retirement income
- Social Security benefits