If you are self-employed or an owner of a pass-through business, nobody is withholding tax from your income. You are expected to pay it in instalments through the year, and there are penalties for underpaying even if you settle in full at filing.
Thresholds, rates and the self-employment tax wage base are adjusted regularly. The structure below is stable; the numbers are not. Confirm current amounts on IRS.gov or with your accountant before calculating.
Who has to pay
Broadly, you must make estimated payments if you expect to owe at least a threshold amount in tax for the year after subtracting withholding and refundable credits. This typically catches:
- Sole proprietors and single-member LLC owners.
- Partners and multi-member LLC members.
- S-corporation shareholders, on income beyond their salary.
- Anyone with significant income not subject to withholding — freelance work, investments, rental income.
You may not need to if your withholding from other sources — a spouse's employment, for instance — already covers your total liability.
What you are paying
Two things, in one payment. Income tax at your marginal rate, and self-employment tax covering Social Security and Medicare. Self-employment tax is the part that surprises new owners: as an employee you paid half and your employer paid half, and self-employed you pay both halves. The Social Security portion applies up to an annual wage base that is indexed each year; the Medicare portion has no cap, with an additional amount above a higher threshold.
You can deduct the employer-equivalent half of self-employment tax when computing your adjusted gross income, which softens it somewhat.
The four deadlines
| Period covered | Payment usually due |
|---|---|
| January 1 – March 31 | April 15 |
| April 1 – May 31 | June 15 |
| June 1 – August 31 | September 15 |
| September 1 – December 31 | January 15 of the following year |
Note the periods are not equal quarters. When a due date falls on a weekend or a legal holiday it moves to the next business day, so confirm the exact date each year.
Safe harbour: how to avoid a penalty
You do not have to predict your income perfectly. The penalty is avoided if you pay enough to meet one of the safe harbours — generally either a set percentage of the current year's liability, or a set percentage of the previous year's total tax, with a higher percentage applying above an adjusted gross income threshold.
It is a known, fixed number available in January. Basing your instalments on last year's tax means you can be confident you are penalty-safe even in a year when income turns out much higher than expected — you simply pay the balance at filing. Confirm the current percentages, which depend on your income level.
A routine that works
-
Open a separate tax account
A second business account used for nothing else. See opening a business bank account.
-
Transfer a percentage of every deposit
On the day money lands, move your tax percentage across. The right percentage depends on your bracket, state and deductions — set it with your accountant for your first year, then adjust once you have real figures.
-
Pay from that account on each due date
Electronically through IRS Direct Pay or EFTPS. Both are free; EFTPS requires enrolment in advance, so set it up before you need it.
-
Do not forget state
Most states with an income tax run their own estimated payment system with its own portal and, sometimes, different due dates.
-
Review mid-year
If income has shifted materially, recalculate rather than continuing on a stale figure.
If you have fallen behind
- Pay as soon as you can. The penalty is computed like interest on the underpayment, so it accrues by the day — a late payment is better than a further-delayed one.
- Consider increasing withholding if you or a spouse also have employment income. Withholding is generally treated as paid evenly across the year, which can retroactively cover earlier shortfalls in a way an estimated payment cannot.
- Use the annualised income method if your income is genuinely seasonal. It lets you match payments to when income was actually earned, rather than assuming four equal instalments.
- File on time regardless. The penalty for filing late is substantially worse than the one for paying late.
Questions owners ask
What percentage should I set aside?
It depends on your bracket, your state, your deductions and your entity. Rather than adopt a rule of thumb, have your accountant set a figure for your first year from your actual circumstances — being meaningfully wrong in either direction is costly.
What if my income is unpredictable?
Use the prior-year safe harbour, which is a fixed known amount, or the annualised income method if your income is genuinely seasonal. Both exist precisely for this.
Can I just pay it all at the end?
You can pay the balance at filing, but if you should have made instalments you will generally owe an underpayment penalty on top. The system expects payment through the year, not at the end of it.
Do I need to file anything with the payment?
Paying electronically, no separate form is needed — you designate the payment type and tax year. Form 1040-ES provides the worksheets and vouchers if you prefer to compute and pay by post.
Where to check
- IRS — estimated taxes
- IRS — Form 1040-ES
- IRS Direct Pay and EFTPS
- Your state revenue department, for state estimated payments