Tax
Quarterly estimated taxes: a calm guide for owners
If you run a profitable small business, the IRS expects to be paid four times a year. Here is how to work out the number and stop dreading April.
Hannah Okafor, EA5 min read
Employees pay tax every payday through withholding. Business owners do not, so the IRS and the Minnesota Department of Revenue expect you to pay as you go through quarterly estimated payments. Skip them and you will owe the full bill in April plus an underpayment penalty, which currently runs at around 8 percent a year.
The good news is that estimates are less complicated than they look. You need a deadline calendar, a sensible way to calculate the amount and a separate place to keep the money.
The four deadlines
Federal and Minnesota estimates follow the same calendar. Note that the quarters are not equal: the second one covers only two months.
- April 15 for income earned January to March
- June 15 for April and May
- September 15 for June to August
- January 15 of the following year for September to December
If a deadline lands on a weekend or holiday, it moves to the next business day. Pay through IRS Direct Pay and the Minnesota e-Services portal, and save the confirmation numbers in the same folder as your return.
How much to pay
There are two safe harbours that protect you from penalties. The first is to pay 100 percent of last year's total tax, split into four equal payments. If your adjusted gross income was above $150,000, that rises to 110 percent. The second is to pay 90 percent of this year's actual tax, which means estimating your profit as the year goes.
The prior-year method is simple and works well if your income is steady or growing. The current-year method is better when profit has dropped, because you are not overpaying based on a stronger year. For most of our clients we start with the safe harbour and adjust in September once the year has taken shape.
The goal is not to get the estimate exactly right. It is to avoid a penalty and keep the April bill small enough to pay without borrowing.
Make it automatic
Open a separate savings account and name it Tax. Every time a client payment lands, move 25 to 30 percent of the profit across. When an estimate is due, the money is already sitting there. Owners who do this almost never tell us that April was stressful.
If you are an S corporation owner, you have one more option: increase the federal and state withholding on your own payroll. Withholding is treated as if it were paid evenly through the year, even if you add it in December, which makes it a useful way to catch up late.
Estimates are not glamorous, but they are the single habit that separates calm tax seasons from panicked ones. If you want us to run the numbers for you, every Growth plan includes quarterly calculations and a reminder a week before each deadline.
