Estimated tax payments are payments for taxes on income that is not subject to withholding tax. This can include income from self-employment, business earnings, interest, rent, dividends and other sources. Many business owners and individuals who receive K-1s for their interests in companies must make estimated tax payments on this type of income.
The IRS requires estimated taxes to be paid quarterly, typically in four installments. To simplify – if you work for a large company, you receive a paycheck and the company pays taxes on your behalf. If you are a business owner, rental property owner, or investment owner, no one is withholding taxes on these respective types of income! Hence, it is up to you to make estimated tax payments during the year.
If you underpay your estimated taxes, you will have to write a bigger check to the IRS when you file your tax return. If you overpay your estimated tax, you will receive the excess amount as a tax refund (similar to how withholding tax works). Pay during the year and reconcile on April 15.