Is there a penalty for overpayment of estimated taxes for self-employed taxpayers?

Paying income taxes every year is something required by the Internal Revenue Service of anyone with an income, but it's not exactly a quick, easy or straightforward process, is it?

Getting a handle on paying taxes is particularly challenging for self-employed workers who are responsible for doing their professional work and running every aspect of their business, including keeping ongoing track of all the necessary tax documentation, doing the math accurately, and filing all the paperwork, etc.

And that includes handling one of the more cumbersome accounting chores: making estimated tax payments every quarter -- with the correct amounts and by the deadline, to avoid penalties from the IRS. If that sounds like a lot of work and you are not an expert on accounting, you can:

• hire an accountant
• learn how to do all the calculations yourself through old-fashioned bookkeeping
• employ the help of a smart 1099 expense tracker app like Bonsai Tax, that will calculate reasonably estimated tax payments for each quarter, help you file your tax return due on April 15 of every year -- and take the bulk of the rest of accounting/bookkeeping tasks off your shoulders.

If you are unsure of how to properly anticipate quarterly tax payments to the Internal Revenue Service as a 1099 self-employed worker, read on for some simple explanations -- and to learn how to de-complicate and streamline your business finances with the Bonsai Tax accounting software designed specifically for you and your freelancer needs.

Note: If you want to pay the correct amount, never miss a deadline and record all your business expenses, then try Bonsai Tax. Our tax software can help you estimate your taxes and help you maximize your tax deductions. On average, users save $5,600 from their tax bill. Try a 7-day free trial today.

The American pay-as-you-go taxation system

Let's start by taking a moment to understand the principle behind how U.S. taxes are paid.

The IRS subscribes to the "pay-as-you-go" taxation approach, whereby taxpayers need to pay a certain number of percent in taxes to the IRS on all income -- on an ongoing basis.

Differentiating income tax payment between W-2 employees and 1099 workers

All Americans pay income tax, but the way it's done varies depending on the taxpayer's employment type/status.

W-2 Employee Tax Responsibilities

Taxpayers working for someone else (as opposed to themselves) are considered "W-2 typical salary employees". Those employees have taxes automatically withheld from each paycheck they receive from the company that issues them. Those employees fill out a W-4 form at the beginning of the year, indicating what percent of tax is to be withheld on their behalf (as of 2024, Form W-4 has been redesigned for an easier way to calculate the appropriate amount of withholding allowances -- and it is easier to follow and fill out).

Self-Employed Workers' Tax Responsibilities

Self-employed freelancers/contractors (a.k.a. "1099 workers"), on the other hand, need to make their own arrangements for paying taxes to the IRS -- and to do so on a regular basis. For freelancers who typically have multiple clients and work on differently-sized projects, income does not come in uniform sums of money, or from the same origins, or on the same schedule as others.

This is why it is imperative for independent contractors to keep meticulous track of their finances: because if they don't keep good records of income -- as well as business expenses to write off in order to lower the income tax to pay to the IRS-- they will leak money from their business and likely incur IRS penalties for not reporting income properly, underpaying (or defaulting on) quarterly taxes, missing the payment deadline, etc.

The Bonsai Tax app can help you wrestle the whole process under control -- and spare you all the complex calculations of quarterly tax estimates and pretty much all other accounting math associated with your business. Just answer some questions, enroll some data, scan some receipts -- and the rest is organized, calculated, filled out, and processed by the software.

Quarterly estimated tax payments: how freelancers pay taxes

As it would be supremely complicated to send in tax payments on each individual transaction that brings income to the freelance taxpayer, the IRS instead expects a "quarterly" installment to be made every three months, each by a specific deadline. It is preferable that the quarterly payments are equal in value to each other within the same year (but if a taxpayer finds that their income fluctuates wildly between quarters, they must alert the IRS by filing form 2210 along with the annual tax return).

Quarterly estimated taxes are mandatory and must be paid by any freelancer owing more than $1000 from their earnings per given tax year.

Quarterly taxes paid by self-employed workers

1099 Workers typically pay two types of tax:

• Income tax on earnings
• Self-employment tax, which covers Social Security and Medicare contributions

• Income Tax. This includes federal tax for all Americans and state tax for those who live in U.S. states with state taxes.
• Self-Employment Tax. This tax serves as the Social Security and Medicare tax for the self-employed.

Determining estimated tax payments

In order to estimate taxes to pay each quarter of the coming year, you have to have an idea of the income you expect to earn.

The most popular way to estimate the coming year's income is to base it on previous year's total income.

Next, look up that income in the IRS marginal tax bracket: it will give you the percentage of your income you have to pay.

Next, you calculate your income and self-employment tax liability for the whole year using the following formulas (2024):

• Income Tax: your Adjusted Gross Income x Tax Rate
• Self-Employment Tax: (Your Total Income x 92.35) x 15.3

Once you calculate the tax liability for the year, you split it into four: and now you have your quarterly estimated tax payments.

Alternatively, this would be a great time to bring abroad the Bonsai bookkeeping software to calculate quarterly federal/state income tax and self-employment tax estimates for you under its famous 100% accuracy guarantee...

When are quarterly estimated taxes paid?

When are quarterly taxes due? Quarterly tax due dates for the 2024 tax year are as follows (except for when a due date falls on a weekend or holiday, in which case the payment is due the following business day):

• January 1 to March 31: file by April 15, 2021
• April 1 to May 31: file by June 15, 2021
• June 1 to August 31: file by September 15, 2021
• September 1 to December 31: file by January 18, 2022 (note: if you file your 2021 taxes by January 31, 2022, and pay the entire balance due with your tax return, you don't need to pay this fourth installment)

Keep in mind that your minimum quarterly payments to keep from getting fined are cumulative. This means that if you paid enough for two quarters during your first-quarter payment, you can skip sending in the payment when quarter number two rolls around.

Where to make your estimated tax payments

Estimated tax payments to the IRS can be made in a variety of ways. The most popular of which are:

• Electronic Federal Tax Payment System (EFTPS)
• IRS Direct Pay
• Mailing a check or money order with Form 1040-ES voucher

• Print out and mail Form 1040-ES
• Pay by phone
• Pay online via the Electronic Federal Tax Payment System
• Pay by IRS2Go mobile app

Underpayment vs. overpayment of estimated taxes

Overpayment of taxes is preferable to underpayment. The IRS expects overpayments, and any money overpaid will be refunded. Underpayment results in penalties.

Ideally, you should strike a balance in which you overpay quarterly taxes somewhat -- but just enough to stay on the safe side of covering what you may owe and avoid a penalty (i.e. just enough that you are sure you won't accidentally underpay).

So, what is the "sweet spot" of a tax estimate?

How much to budget for estimated tax liability?

The convention is to set aside 30%-35% of each paycheck / earning for estimated payments.

What is the penalty for underpaying estimated tax?

The underpayment tax penalty can be calculated by using Form 2210.

The penalty calculation is based on:

• The amount underpaid
• The period of underpayment
• The IRS interest rate for underpayments

• The amount of the underpayment
• The duration of the time when the payment was due and underpaid
• The interest rate for underpayments that applies to a given quarter

You can let the IRS calculate the underpayment penalty for you if your case falls under the following criteria:

• You did not put aside enough tax by the year's end
• You are not eligible for any exceptions
• You did not file a Form 2210
  

How Soon Are Taxpayers Penalized For Underpaying Estimated Taxes?

The IRS does not pay attention to taxpayers' quarterly payments from the prior year until the tax return is filed (Schedule C, Form 1040) for the following year. At that point, the IRS calculates your total tax due based on the income you made over the year and cross-references it against the quarterly payments. If the tax liability for the year has not been fully covered, the IRS notifies the taxpayer by mail.

Is there a penalty for overpaying estimated tax?

There is no penalty by the IRS for overpaying taxes.

While the IRS collects interest on underpaid taxes, it does not pay interest on overpaid amounts. Therefore, avoid giving the government thousands of dollars for months without receiving anything in return.

That money could be put to work for you or your business instead! For example, you could use it to pay off a credit card debt that would otherwise continue accruing interest.

Avoid overpaying estimated taxes excessively because that money can work better in your own pocket.

How Soon Can I Expect To Be Refunded Overpaid Taxes For The Year?

The taxpayer has a choice to have their overpayment refunded -- or have it applied to the following year's estimated tax payment.

Tax overpayment refunds are released six-to-eight weeks from the date the IRS receives your tax return (assuming it is complete and without errors).

If you choose that your IRS overpayment is applied to next year's taxes, it will be applied to the first installment of estimated payments of the following year.

How to avoid overpayments

Estimate your taxes accurately using current tools

Accurately estimating your taxes is the first step to avoiding overpayments. Use updated tax calculators like the IRS Tax Withholding Estimator or software such as TurboTax and QuickBooks, which incorporate 2024 tax brackets and deductions. These tools help you project your tax liability based on your income, expenses, and filing status.

For freelancers and small business owners, tracking quarterly income and expenses is crucial. Apps like FreshBooks or Bonsai can automatically categorize expenses and estimate quarterly taxes, reducing guesswork. Regularly updating your income figures ensures your estimates stay aligned with your actual earnings.

To avoid overpaying, review your estimates at least once per quarter and adjust your tax payments accordingly. This proactive approach minimizes the risk of sending too much money to the IRS and keeps your cash flow healthier throughout the year.

Adjust your estimated tax payments promptly

Making timely adjustments to your estimated tax payments prevents overpayment penalties and cash flow issues. The IRS requires freelancers and small business owners to pay estimated taxes quarterly, but these payments should reflect your current income, which can fluctuate.

If your income or deductible expenses change, update your estimated payments immediately. For example, if your business income increases mid-year, increase your quarterly payments to avoid a large tax bill in April 2025. Conversely, if income drops, reduce payments to prevent overpaying.

Use IRS Form 1040-ES worksheets or tax software to recalculate your estimated payments. Setting calendar reminders to review your tax situation every three months ensures you stay on track and avoid unnecessary overpayments.

Keep detailed records to claim all deductions and credits

Maintaining thorough records of your business expenses helps you claim every eligible deduction and credit, reducing your taxable income and preventing overpayment. Use tools like Expensify and Bonsai to scan receipts and organize expenses by category:

• Office supplies
• Travel
• Home office deductions

For example, if you miss deducting a $1,000 business expense, you might overpay taxes by about $220 to $240, depending on your tax bracket. Accurate records ensure you don’t pay more than required and can support your claims in case of an audit.

Regularly updating your records throughout the year makes tax filing smoother and more accurate. This practice minimizes errors that lead to overpayments and helps you maximize your tax savings in 2024 and beyond.

Consult a tax professional for complex situations

When your tax situation involves multiple income streams, investments, or changing tax laws, consulting a tax professional can prevent costly overpayments. CPAs and enrolled agents stay current with 2024 tax code changes and can tailor advice to your business.

For example, if you recently started offering new services or hired employees, a tax advisor can help adjust your estimated payments and identify new deductions. They can also help you avoid common pitfalls like misclassifying workers or missing state-specific tax credits.

Investing in professional advice early in the tax year can save you money by optimizing your tax strategy and preventing overpayments. Schedule a consultation at least once a year to review your tax plan and make necessary adjustments.

Will the IRS notify you if you overpaid your taxes?

How the IRS detects tax overpayments

The IRS automatically detects tax overpayments when you file your tax return. They compare the amount of tax you owe with the payments you've made through withholding or estimated tax payments. If you have paid more than your tax liability, the IRS records this as an overpayment in their system.

For freelancers and small business owners, this process is especially important because estimated tax payments can sometimes exceed your actual tax due. For example, if you estimated your quarterly payments based on projected income but earned less, the IRS will recognize the difference as an overpayment once your return is processed.

Understanding this detection process helps you anticipate when to expect a refund or credit, so you can plan your cash flow accordingly. Keep accurate records of your payments and income to ensure your filings reflect the correct amounts.

When and how the IRS notifies you about overpayments

The IRS typically notifies taxpayers about overpayments through a refund issuance or an official notice. If you overpaid, the most common notification is the arrival of your refund check or direct deposit confirmation, usually within 21 days of filing electronically in 2024.

In some cases, the IRS may send a CP12 notice, which explains changes to your return and any resulting refund amount. This notice clarifies why your refund might differ from what you expected, such as adjustments for credits or deductions. Freelancers should watch for this notice if their tax situation changed after filing.

To stay informed, use the IRS 'Where's My Refund?' tool available on IRS.gov or the IRS2Go mobile app. These tools provide real-time updates on your refund status and any notifications, helping you track your overpayment without waiting for mailed correspondence.

What to do if you don’t receive notification or refund

If you believe you overpaid but haven’t received a refund or notification within 21 days of e-filing, take proactive steps. First, verify your return was accepted and processed using the IRS online refund tracker. Sometimes delays occur due to errors or additional review.

For freelancers who file paper returns, processing times can extend to 6-8 weeks, so patience is necessary. However, if the delay stretches beyond this, contact the IRS directly at 1-800-829-1040 to inquire about your refund status. Keep your tax return and payment records handy for reference.

Additionally, if you discover an overpayment after the IRS has processed your return, you can file Form 843 to request a refund or credit. Acting promptly ensures you recover funds that can improve your business cash flow or reduce future tax payments.

How to claim your estimated tax refund

Identify if you have overpaid your estimated taxes

To claim an estimated tax refund, first confirm that you have overpaid your taxes during the year. Overpayment occurs when your total estimated tax payments and withholding exceed your actual tax liability for the 2024 tax year. You can verify this by completing IRS Form 1040-ES worksheets or using tax software like TurboTax or TaxAct, which automatically calculate your payments versus your tax owed.

For freelancers and small business owners, it’s common to make quarterly estimated payments using Form 1040-ES. If you paid more than required, the IRS will show this as a credit or overpayment on your annual tax return. Keep detailed records of all payments made throughout the year, including dates and amounts, to avoid confusion during tax filing.

Once you confirm an overpayment, you can proceed to claim your refund by properly reporting it on your tax return. This step ensures you get back the money you paid in excess without delays or penalties.

File your tax return accurately to request a refund

Claiming your estimated tax refund requires filing your federal tax return using Form 1040 for the 2024 tax year. When completing the form, enter your total estimated tax payments on Line 26, and your total tax liability on Line 24. If your payments exceed your liability, Line 34 will show your overpayment amount, which you can request as a refund or apply to next year’s estimated taxes.

Using tax software like H&R Block, TaxSlayer, or TurboTax can simplify this process by automatically calculating overpayments and guiding you through refund options. Alternatively, a tax professional can help ensure your return accurately reflects your payments and maximizes your refund.

Be sure to file your return by the April 15, 2025 deadline to avoid late-filing penalties. If you expect a refund, filing electronically and choosing direct deposit can speed up the refund process, often delivering funds within 21 days.

Consider applying your refund to future estimated taxes

Instead of receiving a direct refund, you can choose to apply your overpayment to your next estimated tax payments. This option is especially useful for freelancers and small business owners who prefer to reduce quarterly payment burdens throughout 2025. On Form 1040, simply check the box on Line 35 to apply your refund to next year’s taxes.

This approach helps manage cash flow by reducing the amount you need to pay in upcoming quarters. For example, if you overpaid by $1,200, you can split that amount across your four 2025 estimated payments, lowering each by $300. This strategy also reduces the risk of underpayment penalties in the following year.

Review your income projections for 2025 carefully before applying your refund forward. If your income is expected to increase, you might still owe additional estimated taxes despite the credit. Adjust your payments accordingly to avoid penalties.

Track your refund status and handle delays

After filing your tax return, track your estimated tax refund status using the IRS "Where’s My Refund?" tool available on IRS.gov. This tool updates daily and provides estimated deposit dates, helping you plan your finances effectively. Most refunds are processed within 21 days when filed electronically with direct deposit.

If you file a paper return or request a paper check, expect longer wait times, often up to six weeks. In case of delays, the IRS may contact you for additional information or corrections. Respond promptly to avoid further processing delays.

For state tax refunds, check your state’s tax department website for similar tracking tools, as timelines and procedures vary by state. Staying proactive ensures you receive your refund quickly and can apply it to your business needs or personal expenses.

It's ok to need a little help with taxes

The last thing any business owner needs is the shock of being hit with a bill for outstanding tax liability they were unaware of, with interest and underpayment penalties added.

The best way to avoid such surprises is to use a reliable digital accounting toolkit that keeps you in control and on schedule.

Let Bonsai tax estimate your quarterly income tax payments and handle other accounting needs

Freelancers thrive most when they work smarter, not harder. This is true for everyone.

The Bonsai Tax app allows you to focus on the professional work you do best—work no one else can do—and leave the accounting, bookkeeping, number-crunching, and form-filling to an intelligent tool designed for this purpose. The Bonsai Tax app will:

• Track your income
• Scan/organize your business expense receipts for maximum deductions
• Auto-import your credit card/bank data in real-time
• Calculate estimated tax payments every quarter
• Issue "profit & loss" financial reports to keep you on-budget
• Auto-fill/help to file your tax return
• Take care of all of your freelancer accounting needs -- all in a safe, secure, super-easy-to-use, cloud-based online account, accessible from Mac, PC, iOS, and Android devices

Sign up for our free trial and experience the extraordinary utility value and the peace of mind you get with having Bonsai Tax on your side.