If you are an employee of a business, the employer is responsible for deducting federal and state taxes from your salary. However, independent contractors and self-employed individuals have to take care of this financial obligation on their own. Generally, these individuals will make estimated quarterly tax payments, and skipping them can lead to penalties and interest. Here’s what you need to know regarding estimated tax payments:

Estimated Taxes

Earnings that aren’t subject to withholding will require the taxpayer to make estimated tax payments to cover their financial liability to the IRS. This type of income can come from dividends, rent, self-employment income, alimony, and awards. If your income has had taxes withheld, you may still owe estimated taxes if you haven’t paid enough income tax.

The first time you have to pay estimated taxes can be a little confusing when you try to determine the amount you owe. Self-employed individuals don’t just owe federal income tax; they are also subject to a 15.3% self-employment tax, which covers the amounts you’d be taxed for Medicare and Social Security.

Don’t forget about deductions, which lower your taxable income, therefore reducing your tax liability. Next, you’ll want to claim any credits you qualify for.

If you owe income taxes as an employee, you have to pay the full amount by April’s filing deadline to avoid interest and penalties. Estimated taxes work a little differently as they are paid in four quarterly installments: April. June, September and January of the next year.

You’ll need to pay enough taxes on each o these due dates to avoid a penalty. Even if you’re owed a refund in April, you can still get penalized for underpayment on one of the due dates. You’ll need to ow less than $1,000 in taxes to avoid being penalized, or you may opt to pay 90% of your liability for the current year, or prove you paid everything for the prior year (Whichever amount is smaller).

State Taxes

You’re not just required to pay federal taxes, so don’t forget to factor in your state income tax as well. States impose the same due dates for estimated taxes as federal taxes, and depending on the state, you may face penalties or fines for underpayment or late payments.