Quarterly Estimated Tax Payments: A Practical Guide
Self-employed or own a small business? Here is how quarterly estimated taxes work, when they are due, and how to avoid underpayment penalties.
When you work for an employer, tax comes out of every paycheck without you thinking about it. Once you are self-employed, freelancing, or taking profits from your own business, nobody does that for you. The IRS still wants its money during the year, not all at once in April. That is what quarterly estimated tax payments are for.
This guide walks through who needs to pay, when payments are due, how the safe-harbor rules work, how to figure the amount, and what to do if you have already fallen behind.
Who Needs to Make Quarterly Estimated Tax Payments?
The U.S. tax system is pay-as-you-go. If you expect to owe more than a modest amount when you file your return, and that tax is not being covered by withholding or credits, you are generally required to make estimated payments. The IRS sets the exact threshold, and the current figure appears in the Form 1040-ES instructions.
People who commonly need to pay estimated taxes include:
- Sole proprietors and single-member LLC owners who report income on Schedule C
- Partners in a partnership and members of a multi-member LLC
- S corporation shareholders whose share of profits is not covered by payroll withholding
- Freelancers, gig workers, independent contractors, and consultants paid on Form 1099
- Landlords with rental income
- Individuals with significant interest, dividends, capital gains, or alimony from older divorce agreements
Remember that self-employed people owe self-employment tax (Social Security and Medicare) in addition to income tax. That second tax is often what catches new business owners off guard.
Corporations that file Form 1120 have their own estimated tax rules and generally pay in installments during their tax year. If you run a C corporation, talk with us about its schedule separately from your personal one.
When Are Estimated Tax Payments Due?
For individuals on a calendar year, federal estimated payments are generally due on these four dates:
| Payment | Covers income earned | Generally due |
|---|---|---|
| 1st | January through March | Mid-April (April 15) |
| 2nd | April and May | Mid-June (June 15) |
| 3rd | June through August | Mid-September (September 15) |
| 4th | September through December | Mid-January of the next year (January 15) |
Notice that the "quarters" are not equal. The second period is only two months long, and the last one is four. When a due date falls on a weekend or legal holiday, it moves to the next business day. Disaster declarations can also postpone deadlines for affected areas, so always check the current calendar. Our tax due dates page is a good place to start.
Georgia also requires estimated payments from individuals who expect to owe state income tax that is not covered by withholding. Georgia uses Form 500-ES, and its dates generally line up with the federal schedule.
What Is the Safe Harbor Rule for Estimated Taxes?
Estimating a full year of business income in April is hard. The safe-harbor rules exist so you can avoid an underpayment penalty even if your guess turns out low. In general, you are protected from the federal penalty if your withholding and timely estimated payments add up to at least the smaller of:
- 90% of the tax you owe for the current year, or
- 100% of the tax shown on your prior-year return (110% if your prior-year adjusted gross income was above a certain level set by law)
The prior-year method is popular with business owners because it is based on a number you already know. If your income is growing, paying 100% (or 110%) of last year's tax in four equal installments keeps you penalty-free, though you will still owe the remaining balance when you file. Plan to set that money aside.
A few details matter here. The prior-year option generally requires that you filed a return for a full 12-month prior year. Also, safe harbor protects you from the penalty, not from the tax itself.
How Do You Calculate Your Quarterly Estimated Tax?
The IRS provides a worksheet in Form 1040-ES, and IRS Publication 505 explains the rules in depth. In plain terms, the process looks like this:
- Project your income for the year. Start with year-to-date profit from your books and estimate the rest of the year realistically. Include other income such as wages, rentals, and investments.
- Subtract expected deductions. Use either the standard deduction or your expected itemized deductions, plus business-related deductions such as the deductible part of self-employment tax and retirement contributions.
- Figure income tax on the result. Use the current year's tax rate schedules, which the IRS adjusts for inflation each year.
- Add self-employment tax on your net earnings from self-employment, along with any other taxes you expect to owe.
- Subtract credits and withholding. Include any federal tax withheld from a spouse's paycheck or your own W-2 job.
- Compare to safe harbor. Decide whether to pay based on your current-year projection or the prior-year safe harbor, whichever makes more sense for you.
- Divide by four and schedule your payments.
If your income is seasonal or arrives unevenly, equal installments may not fit. The annualized income installment method, figured on Form 2210, lets you match payments more closely to when you actually earned the money. It takes more work, but it can reduce or eliminate a penalty for early-quarter underpayments.
One useful planning point: federal tax withheld from wages is generally treated as paid evenly throughout the year, no matter when it was actually withheld. If you or your spouse has a W-2 job, increasing withholding late in the year can help make up for missed estimated payments.
How Do You Pay Estimated Taxes to the IRS?
You have several options, and electronic payments are the easiest to track:
- IRS Direct Pay, which pulls from a checking or savings account
- Your IRS Online Account, where you can also see payments already made
- The Electronic Federal Tax Payment System (EFTPS)
- Debit or credit card through an IRS-approved processor (fees apply)
- A check mailed with the Form 1040-ES payment voucher
Whatever you choose, keep confirmation numbers and record each payment in your books. You will need the dates and amounts when your return is prepared. You can find forms and options on the IRS estimated taxes page.
What Happens If You Miss an Estimated Tax Payment?
Missing a payment does not trigger a single flat fine. Instead, the IRS calculates an underpayment penalty that works much like interest. It is based on how much you underpaid, how long it stayed unpaid, and the interest rate the IRS sets each quarter. Each installment is measured separately, so being short in April is not erased by paying extra in September.
If you have missed a payment, here is what to do:
- Pay as soon as you can. The penalty keeps growing until the shortfall is covered, so a late payment still helps.
- Catch up on the next due date. Increase your next installment to cover the gap.
- Consider extra withholding from wages if you have them, since it counts as paid evenly through the year.
- Ask about a waiver. The IRS may waive the penalty in certain situations, such as a casualty or disaster, or when you retired after reaching a certain age or became disabled and the underpayment was due to reasonable cause.
If you cannot pay your balance when you file, do not skip filing. Filing on time and setting up an IRS payment plan is almost always less expensive than ignoring the bill.
How Heaven & Alvarez Can Help
Estimated taxes are much easier when your books are current and someone is watching the numbers with you. We can project your income, choose a safe-harbor strategy that fits your cash flow, calculate federal and Georgia payments, and adjust them mid-year as your business changes. Learn more about our individual tax preparation and small business accounting services, or call our Norcross office at (770) 849-0078 to schedule a planning conversation. Se habla español.
This article is general information, not individual tax advice. Rules and figures change; please talk with a tax professional about your own situation.
Frequently asked questions
Do I have to pay estimated taxes in my first year of self-employment?
Possibly. If you expect to owe more than the IRS threshold when you file and your income is not covered by withholding, estimated payments are generally required. If you had no tax liability in the prior full year, special rules may protect you from a penalty, so it is worth reviewing your situation with a tax professional.
Can I make one large estimated payment instead of four?
You can pay more than required at any time, but the penalty is measured installment by installment. A single large payment in January will not cover an underpayment that was due in April, June, or September. Paying early is fine; paying late is what creates a penalty.
Does an S corporation owner need to make estimated payments?
Often, yes. Salary paid through payroll has tax withheld, but your share of S corporation profit is reported on your personal return without withholding. Many owners either make estimated payments or increase their payroll withholding to cover that income.
Can I apply my tax refund to next year's estimated taxes?
Yes. When you file, you can choose to apply all or part of an overpayment to the next year's estimated tax. It is generally treated as paid on the first installment due date, which can be a simple way to get ahead.
