Estimated Taxes for Small Business: A Practical Guide

Estimated taxes for small business owners are the payments you make during the year toward your income tax and self-employment tax. When you work for yourself, no employer withholds tax from your earnings, so the IRS expects you to pay as you go. Missing these payments can lead to a penalty, even if you are due a refund when you file.

This guide explains who has to pay estimated taxes, how to figure them, when payments are due, how to pay, and how to avoid the underpayment penalty. It includes a worked example with sample numbers. This article is general information, not tax advice, so talk with a qualified tax professional about your situation.

What Are Estimated Taxes for Small Business Owners?

Taxes in the United States are pay-as-you-go. Employees usually have tax withheld from their paychecks. If you are in business for yourself, you generally need to make estimated tax payments instead.

You use estimated tax to pay income tax, self-employment tax (which covers Social Security and Medicare), and other taxes such as the alternative minimum tax., self-employment tax (which covers Social Security and Medicare), and other taxes such as the alternative minimum tax. For the official rules, see the IRS estimated taxes page.

Estimated tax payments cover your own taxes. Payroll taxes for employees are a separate matter, which our guide to small business payroll explains.

Who Must Pay Estimated Taxes for Small Business?

The IRS says the following generally apply:

• Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
• Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
• You may have to pay estimated tax for the current year if your tax was more than zero in the prior year.

Who Does Not Have to Pay

If you receive wages, you can avoid estimated tax by asking your employer to withhold more tax. To do this, you file a new Form W-4 with your employer. This can be a convenient option if you have a side business and also work as an employee.

You also do not have to pay estimated tax for the current year if you meet all three of these conditions:

• You had no tax liability for the prior year.
• You were a U.S. citizen or resident alien for the whole year.
• Your prior tax year covered a 12-month period.

How to Figure Estimated Taxes for Small Business

Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES to figure estimated tax. The form includes a worksheet to help you.

To figure your estimated tax, you need to estimate your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. Your prior-year tax return is a helpful starting point, but you must also adjust for changes in your own situation and for recent changes in the tax law.

Good records make this much easier. Our guide to small business bookkeeping explains how to keep your numbers organized, your profit and loss statement shows how much you are earning, and our guide to small business tax deductions explains the expenses you may be able to subtract.

If you estimate your earnings too high or too low, you can complete the worksheet again to recalculate your payment for the next quarter. Try to estimate as accurately as you can to avoid penalties. Some taxpayers, such as farmers, fishermen, and certain higher-income taxpayers, have special rules, which are explained in Publication 505.

When Are Estimated Taxes Due?

For estimated tax purposes, the year is divided into four payment periods. Payments are generally due on these dates:

• April 15 for income earned from January 1 to March 31
• June 15 for income earned from April 1 to May 31
• September 15 for income earned from June 1 to August 31
• January 15 of the following year for income earned from September 1 to December 31

Notice that the periods are not equal. The second period covers only two months, while the last one covers four.

If a due date falls on a Saturday, Sunday, or legal holiday, the payment is due the next business day. For mailed payments, the date of the U.S. postmark is the date of payment., the date of the U.S. postmark is the date of payment.

If you don’t pay enough by the due date of each period, you may be charged a penalty, even if you are due a refund when you file your return.

How to Pay Estimated Taxes

You have several options:

• By mail with Form 1040-ES.
• Online, by phone, or from your mobile device using the IRS app.
• Through your IRS online account, where you can also see your payment history.
• For businesses, through a business tax account or Direct Pay for businesses. Some business tax payments must still be made through the Electronic Federal Tax Payment System, known as EFTPS.

If it is easier for you to pay weekly, every two weeks, or monthly, you can, as long as you have paid enough by the end of each quarter.

Estimated Taxes for Small Business Example (Hypothetical)

Here is a simple example. These numbers are hypothetical, and they are for illustration only.

Suppose a sole proprietor estimates that her income tax and self-employment tax for the year will total $6,000. For simplicity, she splits the amount into four equal payments:

• April 15: $1,500
• June 15: $1,500
• September 15: $1,500
• January 15: $1,500

Total paid: 4 × $1,500 = $6,000.

If her income turns out different from her estimate, she can adjust the later payments by redoing the worksheet.

How to Avoid the Estimated Tax Penalty

The IRS says most taxpayers will generally avoid the underpayment penalty if they meet one of these tests:

• They owe less than $1,000 in tax after subtracting withholding and credits.
• They paid at least 90% of the tax for the current year, or 100% of the tax shown on the prior year’s return, whichever is smaller.

Higher-income taxpayers, farmers, and fishermen have special rules.

Using the example above, suppose the sole proprietor’s prior-year return showed $4,000 in tax:

• 90% of this year’s expected tax: 0.90 × $6,000 = $5,400
• 100% of last year’s tax: $4,000
• The smaller amount is $4,000

In this example, paying at least $4,000 on time during the year would generally satisfy that test, though she would still owe the remaining balance when she files. Because special rules can apply, confirm the details in Publication 505 or with a tax professional.

If Your Income Is Uneven

If your income arrives unevenly during the year, you may be able to avoid or reduce the penalty by annualizing your income and making unequal payments. Individuals use Form 2210 to see whether they owe a penalty, and corporations use Form 2220.

The IRS may also waive the penalty in limited situations, such as an underpayment caused by a casualty, disaster, or other unusual circumstance.

Tips for Managing Estimated Taxes

• Mark the four due dates on your calendar. Missing one can lead to a penalty.
• Recalculate each quarter. If your income changes, adjust your next payment.
• Set money aside when you get paid. This makes each payment easier. Our guide to small business cash flow explains how to track the money coming in and going out.
• Keep records of your payments. Your IRS online account also shows your payment history.
• Check your state’s rules. Your state may have its own estimated tax requirements.

Common Mistakes with Estimated Taxes

• Missing a due date. A late payment can lead to a penalty.
• Estimating income too low. Try to estimate as accurately as you can.
• Forgetting self-employment tax. Estimated payments cover it along with income tax.
• Paying everything at the end of the year. Penalties are based on the payment periods.
• Assuming a refund means no penalty. You can still be charged a penalty for underpaying during the year.

Frequently Asked Questions

Who has to pay estimated taxes?

Sole proprietors, partners, and S corporation shareholders generally have to pay if they expect to owe $1,000 or more when they file. Corporations generally have to pay if they expect to owe $500 or more.

When are estimated taxes due?

Generally April 15, June 15, September 15, and January 15 of the following year. If a date falls on a weekend or legal holiday, the payment is due the next business day.

How do I figure my estimated taxes?

Use the worksheet in Form 1040-ES. Start with your prior-year return, estimate your expected income, deductions, and credits, and adjust for changes.

How do I pay estimated taxes?

You can pay by mail with Form 1040-ES, online, by phone, or through the IRS app. Businesses can also use a business tax account or Direct Pay for businesses.

What happens if I miss a payment?

You may be charged a penalty, even if you are due a refund. The IRS provides Form 2210 to figure whether you owe a penalty.

Can I avoid making estimated payments if I have a job?

If you receive wages, you can ask your employer to withhold more tax by filing a new Form W-4.

Conclusion

Estimated taxes for small business owners are a regular part of working for yourself. Learn whether you need to pay, estimate your income as accurately as you can, mark the four due dates, and pay on time. Review the IRS guidance and talk with a qualified tax professional about your situation. This guide is general information and not tax advice.