What is the method of paying tax on income not subject to withholding called?

The method of paying tax on income not subject to withholding is known as estimated tax. This approach is necessary for individuals who receive income that does not have taxes withheld, such as self-employment income, rental income, or interest from investments. Since these income sources don’t automatically deduct taxes at the source, taxpayers must predict their tax liability for the year and make periodic payments to the IRS.

Estimated tax payments are generally made quarterly and ensure that taxpayers meet their tax obligations throughout the year, rather than having to pay a lump sum when filing their return. This method helps prevent underpayment penalties and encourages budget management by spreading payments out over the year.

Other terms, like exempt tax, refer to specific situations where certain income may not be subject to tax, but they do not pertain to the method of paying taxes on income not withheld. Withheld tax generally refers to amounts deducted from wages, and deferred tax refers to taxes that are postponed to a future date, such as in retirement accounts. Therefore, "estimated tax" is the correct choice as it distinctly pertains to the process of managing taxes for income that lacks withholding.