What's the Difference Between Estimated Taxes and Tax Withholding?

Tax withholding and estimated tax payments are two different ways the IRS collects taxes throughout the year, rather than in one lump sum at filing time. Withholding happens automatically when your employer deducts taxes from each paycheck and sends the money directly to the IRS on your behalf. Estimated tax payments are made four times a year by people who have income that isn't subject to withholding, such as freelancers, business owners, landlords, and retirees with pension or investment income. If you don't have enough withheld or don't make estimated payments, you can face an underpayment penalty when you file, even if you wind up getting a refund. The goal of both systems is the same: to pre-pay your tax bill gradually so you're not hit with a large, unexpected amount in April.