Pay-As-You-Go (PAYG)
The US tax system requires taxes to be paid throughout the year as income is earned, either through employer withholding or quarterly estimated tax payments.
The pay-as-you-go principle means the IRS expects you to pay taxes on income as you earn it, not in one lump sum at the end of the year. For W-2 employees, this is handled automatically through withholding. For self-employed individuals, freelancers, and those with significant non-wage income, it means making quarterly estimated tax payments.
Estimated tax payments are due four times per year: April 15, June 15, September 15, and January 15 of the following year. If you do not pay enough throughout the year, you may face an underpayment penalty, even if you pay the full balance by the filing deadline.
There are safe harbor rules that can protect you from penalties. If you pay at least 100% of your prior year's tax liability (110% if your AGI exceeds $150,000) or 90% of the current year's liability through withholding and estimated payments, you will generally avoid the underpayment penalty.
Related Terms
Withholding
The amount of federal and state income tax your employer deducts from each paycheck and sends to the IRS on your behalf throughout the year.
Quarterly Estimated Tax
Tax payments made four times a year by self-employed individuals and others with income not subject to withholding. Due dates are April 15, June 15, September 15, and January 15.
Safe Harbor
IRS rules that protect you from underpayment penalties if you pay at least 100% of the prior year's tax (110% if AGI over $150,000) or 90% of the current year's tax.
Penalty
A charge imposed by the IRS for filing late, paying late, or underpaying estimated taxes. Common penalties include failure-to-file (5% per month) and failure-to-pay (0.5% per month).