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A payment of federal tax that a taxpayer makes when no taxes or not enough taxes are paid through withholding from income. Estimated taxes are often paid by taxpayers who do not pay taxes through withholding, e.g. self-employed people or nonemployee contractors whose income is reported on Form 1099-MISC instead of Form W-2. Additionally, W-2 employees with income from equity compensation may need to pay estimated taxes if the amount of tax they owe on their stock compensation income is greater than the amount of tax the employer withholds from their income.
Federal tax law requires you to pay at least 90% of your income tax liability through either withholding or quarterly estimated tax payments. The penalty for failing to pay sufficient tax is the payment of interest (at stated federal rates) on the owed amount, unless you fit into one of the safe harbors. Therefore, before option exercise, restricted stock vesting, or a sale of company stock, you should determine whether you need to make estimated tax payments.
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