Navigating Estimated Tax Payments

If you’re self-employed, own a business, or consistently earn income that doesn’t have taxes withheld before you receive it, you may have heard that you need to make estimated tax payments throughout the year.

For many entrepreneurs, that requirement brings questions:

How much do I pay?

When do I pay them?

What happens if my income changes?

Estimated taxes can seem complicated at first, but the basic idea is simple. The tax system is pay-as-you-go.

Why Do I Have to Make Estimated Payments?

When you’re an employee, your employer withholds income tax from each paycheck and sends it to the IRS for you throughout the year.

Business owners and self-employed taxpayers don’t always have someone sending those payments in for them.

If you expect you’ll owe enough tax by the end of the year, you may need to send regular payments directly to the IRS.

Estimated payments can cover more than just income tax. For many self-employed entrepreneurs, your payments also cover self-employment tax. That’s your Social Security and Medicare.

But if a business owner just looks at their financials and imagines they’ll “just set aside 20%”, they can end up with an expensive surprise when it comes time to file.

When Are Estimated Payments Due?

Estimated tax payments are generally made four times a year.

For individuals, that schedule is April 15, June 15, September 15, then January 15 of the next year.

You might notice something odd about those dates; those aren’t four equal three-month periods. The second payment only covers two months of income, the fourth covers four months.

That becomes important to plan through if your business sees changing activity throughout the year.

How Much Do I Pay?

Your estimated tax payments are based on your expected tax liability, not just a percentage.

If you’re running a business, you need to consider your revenue, expenses, other income, self-employment tax, any tax credits, withholding from other sources of income, and your prior year tax.

This is where well-kept records save you a ton of guesswork. If you have accurate information, you can project your expected tax due by the end of the year and pay accordingly.

Safe Harbor

You may have heard the term “safe harbor” around estimated payments. The safe harbor gives you another strong anchor when planning out your estimated payments.

The IRS provides two methods for avoiding underpayment penalties so long as each quarter’s estimated payment meets its own requirement:

90% of your current year tax liability - this is great in years with falling income, but requires solid projections and accurate records to calculate

100% of your prior year tax liability - this is better in years with rising income and is easy to calculate as long as your returns are up to date. Higher income taxpayers will be required to pay in 110% of the prior year.

What’s important about this? The safe harbor makes it to where you don’t have to predict your tax bill down to the dollar to avoid penalties.

What if Income Changes?

Again, this is where your records save you throughout the year.

Imagine you expected your business to earn $80,000 this year and you make your first estimated payment based on that expectation.

Then business takes off.

By August, you're on track to earn $150,000.

That's okay.

Estimated payments are estimates.

As your business changes, you can revisit your projected income and adjust your future payments accordingly.

The same works in the other direction.

If your income drops significantly, you may need to revisit your projections rather than continuing to make payments based on assumptions that are no longer accurate.

Your tax planning should change when your business changes.

You Still File a Return

Estimated payments cover your liability, they don’t substitute for the return itself.

When you file the return, you calculate the actual tax liability and compare it to what you’ve paid with your withholding and estimated payments.

If you’ve overpaid, you may receive a refund. If you’ve underpaid, you’ll owe the difference.

Your estimated payments keep you on track, so you aren’t slammed with a nasty bill at the end of the tax year.

Don't Let April Be Your First Tax Planning Conversation

Estimated taxes don't have to be intimidating.

The key is to understand what you're earning, keep your financial records current, and revisit your projections as your business changes.

Your business doesn't stay the same throughout the year.

Your tax plan shouldn't either.

Midas Tax & Advisory helps entrepreneurs and small business owners stay ahead of their taxes with practical, year-round tax planning.

Financial clarity, so you can build what matters.