Estimated Taxes for Business Owners: What They Are and How They Work
If you work for someone else, taxes are usually taken out of every paycheck. Your employer sends that money to the government for you.
When you work for yourself, that may not happen.
You receive the money you earned, but nobody automatically sets aside the portion that may eventually belong to the IRS or your state. That can make it feel like your tax bill suddenly appeared when your return was prepared.
It did not.
The tax was building as you earned the income. Filing your return simply revealed whether you had already paid enough.
Estimated tax payments are how many business owners pay those taxes during the year instead of waiting until tax-filing season.
What are estimated taxes?
Estimated taxes are advance payments toward the taxes you expect to owe for the current year.
They are not a special tax, an additional tax or a fee for owning a business. They are your regular taxes, paid throughout the year because they are not being fully withheld from a paycheck.
For a self-employed person, estimated payments may cover:
Federal income tax
Self-employment tax, which generally includes Social Security and Medicare taxes
Other taxes that may apply to the individual situation
Your state may also require separate estimated payments. State rules, calculations and deadlines do not always match the federal rules.
Why do business owners make estimated payments?
The federal tax system generally expects taxes to be paid as income is earned. Employees usually accomplish this through withholding from their paychecks. People who receive income without enough withholding may need to make estimated payments instead.
This commonly affects:
Sole proprietors
Independent contractors
Freelancers and gig workers
Partners in partnerships
Shareholders of S corporations
People with rental, investment or other income that is not subject to withholding
The IRS generally says individuals—including sole proprietors, partners and S corporation shareholders—may need to make estimated payments when they expect to owe at least $1,000 when they file their return.
That does not mean every business owner will make payments the same way. Your business structure, household income, deductions, credits and existing withholding all affect the calculation.
For example, a business owner whose spouse has substantial federal tax withheld from a paycheck may have a different payment requirement from an unmarried owner earning the same business profit.
The business income may be similar. The household tax picture is not.
“Quarterly taxes” are not four separate taxes
Estimated taxes are often called quarterly taxes, but that name causes confusion.
You are not calculating four entirely separate tax bills. You are estimating your tax for the year and making payments toward it during four payment periods.
For calendar-year taxpayers, the federal due dates are generally:
April 15
June 15
September 15
January 15 of the following year
If a date falls on a weekend or legal holiday, the deadline generally moves to the next business day. Notice that these payments are not spaced exactly three months apart, which is another reason not to rely on a simple “every three months” reminder.
How are estimated taxes calculated?
This is the part that makes estimated taxes feel intimidating. You are trying to calculate a tax bill before the year is over and before all the final numbers are known.
But an estimate does not have to be a random guess.
The process generally starts with what you know:
Your prior-year tax return
The income you expect to receive this year
Your expected business profit
Other household income
Deductions and tax credits you expect to claim
Federal taxes already being withheld
Estimated payments already made
Your previous return provides a starting point. Then you adjust for what has changed.
Did the business grow? Did your profit margin fall? Did your spouse change jobs? Did you add payroll, purchase equipment, lose a major customer or receive income from somewhere else?
Each of those changes may affect the estimate.
The IRS provides an Estimated Tax Worksheet in Form 1040-ES. It uses expected adjusted gross income, taxable income, taxes, deductions and credits to help determine the estimated amount.
Estimate taxes from profit—not the money deposited in your account
One of the most common points of confusion is the difference between revenue and profit.
Suppose your business collects $100,000 from customers and has $40,000 of ordinary and necessary business expenses.
Your starting point is not simply the full $100,000 of revenue. The business profit is generally closer to:
$100,000 revenue − $40,000 expenses = $60,000 business profit
That does not mean you can multiply $60,000 by one universal tax percentage and have the exact answer. Your overall tax calculation can also be affected by self-employment tax, other income, filing status, deductions, credits, withholding and additional factors.
But it does mean that knowing your current business profit matters. If your bookkeeping is months behind or your expenses are incomplete, your tax estimate may be built on the wrong number.
What if your income changes during the year?
You update the estimate.
An estimate made in January is based on what you knew in January. It does not remain correct simply because you calculated it once.
If your business has an unexpectedly strong first half, you may need to increase the remaining payments. If revenue drops or expenses rise, the original estimate may be too high.
The IRS allows taxpayers to refigure their estimated tax when expected earnings change. This is especially important for businesses with seasonal or uneven income.
Estimated-tax planning should therefore be treated as an ongoing process:
Estimate. Compare. Adjust. Repeat.
What happens when you file your tax return?
Your final tax return compares what you actually owed for the year with what you already paid through withholding and estimated payments.
If you paid less than the final amount owed, you generally pay the remaining balance.
If you paid more than the final amount owed, the overpayment may be refunded or applied to the following year.
This is why filing your return does not create the tax bill. Filing settles the account for the year.
Can you wait and pay everything when you file?
You may be able to pay the remaining tax with your return, but that does not necessarily mean you paid it on time.
If you were required to make estimated payments and did not pay enough during the applicable payment periods, you may owe an underpayment penalty. A penalty may apply even if the full balance is eventually paid when the return is filed.
There are rules that can help taxpayers avoid or reduce an underpayment penalty, including calculations based on the prior year's tax or the current year's expected tax. Higher-income taxpayers and people with uneven income can face additional rules, so this is an area where individual guidance can matter.
How do you make an estimated tax payment?
Federal estimated payments can generally be made through options such as:
An IRS Online Account
IRS Direct Pay
The Electronic Federal Tax Payment System (EFTPS)
Other payment methods available through the IRS
Form 1040-ES payment vouchers by mail
However you pay, keep a record of:
The date
The amount
Whether it was a federal or state payment
The tax year the payment was applied to
The payment confirmation number
Do not assume every payment was recorded correctly simply because the money left your bank account. Confirm that it was applied to the correct taxpayer and tax year.
Common estimated-tax mistakes
Waiting until the tax return is prepared
By then, the year is already over and most planning opportunities have passed.
Estimating from revenue instead of profit
Business expenses matter. So does having current, accurate bookkeeping.
Forgetting about self-employment tax
Income tax is not always the entire obligation for someone who works for themselves.
Ignoring other household income and withholding
Estimated taxes are generally part of the individual's overall tax return, not an isolated calculation based only on one business.
Making one estimate and never revisiting it
The business can change considerably between January and December.
Paying the IRS but forgetting the state
Federal and state estimated payments are separate obligations.
Losing track of payments
Missing or misapplied payments can create unnecessary confusion when the return is prepared.
The real goal is not a perfect prediction
You will not know every final number before the year ends. That is why it is called an estimate.
The goal is to make a reasonable calculation using the best information currently available, set aside the necessary cash, make payments on time and update the plan when the numbers change.
That is much better than treating every dollar in the business checking account as available to spend and discovering the problem after the year is over.
Want help figuring out your estimated taxes?
Download The Business Owner's Guide to Estimated Taxes for a plain-English process to help you gather the right information, estimate what may be due, decide what to set aside and keep track of the payments you make.
DOWNLOAD THE FREE ESTIMATED TAX GUIDE
Estimating your taxes once is helpful. Keeping the estimate current is where many business owners fall behind.
Estimated-tax planning is also part of the JBS Mint advisory process. We review it alongside your business profit, cash flow, owner pay and upcoming decisions so your tax plan can change when your business does.