Paying estimated quarterly taxes four times per year may seem like a chore. But if you project these quarterly payments correctly, it can actually soften your tax burden; when tax season rolls around, you’ll have already paid your approximate tax liability.
In this guide, we’ll show you how to calculate and pay your federal estimated quarterly taxes, and walk you through an example that clarifies the process.
And if you want help calculating your taxes, you can walk through our free estimated tax calculator.
This tool also functions as a self-employed tax calculator. Just enter in all your information, and we’ll tell you how much tax you owe.
What are estimated tax payments?
If you’re self-employed, you’re generally required to pay your taxes four times a year in “estimated” payments, rather than in one lump sum. The reason it’s called “estimated” is because you’re estimating how much income you’ll make this year, and paying taxes on that amount (income tax, self-employment tax, and any other applicable taxes).
Do I have to make estimated tax payments?
If you intend to file as a sole proprietor, a partnership, S corporation shareholder, and/or a self-employed individual, you’ll generally need to make estimated quarterly tax payments if you will owe taxes of $1,000 or more.
Businesses that file as a corporation generally need to make estimated tax payments if they expect to owe $500 or more in tax for the year. If you meet these IRS minimums, then you’ll likely have to file estimated quarterly taxes.
If you need some help with your estimated taxes, check out Bench. We’ll get your books in order and take care of every tax form (you’ll just need to pay the taxes themselves!).
You don’t need to pay estimated taxes if…
You’re an employee If you’re an employee, your employer should be withholding quarterly taxes on your behalf. That being said, sometimes they can get the amounts wrong—fill out Form-W4 and give it to your employer to make sure that they’re deducting the correct amount.
You’re a special case If you meet three very specific conditions below, then you don’t have to pay estimated quarterly taxes:
- You did not owe any taxes in the previous tax year, and did not have to file a tax return
- You were a US citizen or resident for the entire year
- Your tax year was 12 months long
If you don’t meet all of the criteria for non-payment above, then you’re one of the many Americans who needs to pay estimated quarterly taxes—read on!
How to calculate estimated taxes
To calculate your estimated taxes, you will add up your total tax liability for the year—including self-employment tax, income tax, and any other taxes—and divide that number by four.
You can also use our free estimated tax calculator.
Keep reading for a more in-depth explanation of how to calculate your estimated taxes.
Further reading: What is Self Employment Tax? (2019-20 Rates)
A step by step guide to calculating your estimated taxes
To make the process clear, here’s an example of how Stephanie, a sole proprietor, would calculate her estimated quarterly tax payments, based on her income tax and self-employment tax owed.
Step 1: Estimate taxable income for the year
Let’s start with Stephanie’s income tax. In order to estimate how much income tax she will have to pay for the year, Stephanie estimates her income for the year (let’s say she expects to make 90K this year). She then subtracts any above-the-line deductions she thinks she’ll incur for the year.
$90,000 (estimated income) minus $15,000 (above-the-line deductions) = $75,000. This new number is Stephanie’s “adjusted gross income.”
Then, she subtracts the standard deduction for single tax payers in 2020, which is $12,550.
Stephanie can also deduct 50% of her self-employment tax of $12,716.59 (calculated below). She can deduct $6,358.
So her total estimated taxable income is $56,092.
Step 2: Calculate income tax
Next, Stephanie multiplies her adjusted gross income by her income tax rate (according to the 2021 tax bracket). Tax brackets change each year, so be sure to consult the most recent numbers.
Based on Stephanie’s tax bracket, her estimated income taxes owed for the year works out to $8,130.24.
Step 3: Calculate self-employment tax
Because Stephanie earned more than $400 this year, she will also have to pay self-employment tax. To calculate self-employment tax, she first has to multiply her estimated total income ($90,000) by 92.35%—this is effectively her self-employment taxable income. She then multiplies this number by 15.3%, the self-employment tax rate. Where does the 15.3% come from? It’s the combination of Social Security tax (12.4%) and Medicare (2.9%). Together, they make up the 15.3% “self-employment tax” figure.
So Stephanie’s self-employment tax total is $90,000 x 92.35% x 15.3%, which works out to $12,716.59.
Which brings Stephanie’s estimated quarterly taxes total to: $8,130.24 (estimated income tax owed) + $12,716.59 (estimated self-employment taxes) = $20,846.83
Step 4: Add it all together, and divide by four.
Now, the final step. To calculate her estimated quarterly tax payments for each quarter, Stephanie simply adds together her income tax and her self-employment tax for the year and divides this number by four. Voila.
$8,130.24 + $12,716.59 = $20,846.83 (Stephanie’s total estimated taxes).
$20,846.83/4 = $5,211.71 (Stephanie’s quarterly tax payment).
If you filed your previous year’s taxes with the help of a CPA, they should also be able to send you estimates for this year’s payments. And if you’re paying estimated quarterly taxes for the first time, it can’t hurt to run your numbers by a CPA before submitting.
When are estimated taxes due?
As the name implies, estimated quarterly tax payments are due four times per year, on the 15th of April, June, September, and January (or the next business day if it’s a weekend or holiday).
Here are the 2021 estimated quarterly tax deadlines.
- For the period Jan 1 to March 31: April 15
- For the period April 1 to May 31: June 15
- For the period June 1 to August 31: September 15
- For the period September 1 to December 31: January 15 of the following year
It’s a good idea to set these due dates in your calendar at the start of every tax year.
How to make estimated tax payments
Submitting your payment to the IRS is a breeze: just fill out form 1040-ES and mail it along with a check to the IRS office closest to you.
You can also pay estimated taxes online online or by phone via the IRS Payments Gateway.
For corporations, payments must be filed through the Electronic Federal Tax Payment System.
The pain of tax penalties
The IRS may impose penalties on quarterly tax payments for a few reasons:
- Not paying on time
- Not paying enough estimated tax for the year
To avoid an underpayment or overpayment penalty, you can pay either at least 90% of this year’s tax bill, or pay the same amount (100%) as the taxes you owed last year, whichever is smaller.
The “safe harbor” rule of estimated tax payments
Paying 100% of the taxes you owed in the previous year is sometimes referred to as the safe harbor rule. Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year (but you will still have to make up the additional tax payments).
One important caveat—if your income is more than $150,000 per year, then you’re required to pay 110% of what you paid in taxes last year.
Paying taxes four times a year won’t be the most fun thing you’ll do as an entrepreneur, but proper preparation, organized recordkeeping, and tax-ready books can help make it one of the most painless tasks.
Note: This guide only covers federal taxes. If you live in a state that charges income tax, you may also need to set up quarterly state tax payments.