Estimated Tax Payments for Small Business Owners: What You Need to Know

Jason Medlin
Feb 23
5 min read

Black-and-white photo of calendar and planner representing quarterly estimated tax payment deadlines for small business owners

When you work as an employee, taxes are withheld from every paycheck. By the time April rolls around, you've already paid most of what you owe. Filing is just a matter of squaring up.

When you run a business, nobody withholds anything. The IRS still expects to be paid throughout the year, but now it's your job to make that happen.

That's where estimated tax payments come in. And for many business owners, this is where tax planning goes sideways.

Who Needs to Make Estimated Tax Payments

The general rule: if you expect to owe $1,000 or more in federal taxes when you file your return, you're required to make estimated tax payments throughout the year.

This applies to:

→ Sole proprietors

→ Partners in partnerships

→ S corporation shareholders (for pass-through income)

→ Self-employed individuals

→ Anyone with significant income not subject to withholding

If your business is profitable and you're not having taxes withheld from other income sources like a W-2 job, you almost certainly need to be making estimated payments.

There's an exception: if you owed no tax last year and were a U.S. citizen or resident for the full year, you're not required to make estimated payments this year. But that's a narrow exception that doesn't apply to most established business owners.

When Estimated Tax Payments Are Due

Estimated taxes are paid quarterly, but the quarters aren't even. The IRS uses its own calendar:

Q1 (January 1 - March 31): Due April 15

Q2 (April 1 - May 31): Due June 15

Q3 (June 1 - August 31): Due September 15

Q4 (September 1 - December 31): Due January 15 of the following year

Notice that Q2 is only two months, while Q3 is three months and Q4 is four months. The schedule isn't intuitive, which is why many business owners miss deadlines.

If a due date falls on a weekend or holiday, the deadline moves to the next business day.

How to Calculate Your Estimated Tax Payments

There are two main approaches to calculating estimated payments, and choosing the right one depends on how predictable your income is.

The Safe Harbor Method

The safest approach is to pay 100% of last year's tax liability, divided into four equal payments. If your adjusted gross income was over $150,000 last year ($75,000 if married filing separately), you need to pay 110% of last year's liability instead.

This is called the "safe harbor" because it protects you from underpayment penalties regardless of what you actually owe this year. Even if your income doubles and you owe significantly more, you won't face penalties as long as you met the safe harbor threshold.

The downside: if your income drops significantly, you might overpay throughout the year and have to wait for a refund.

The Current Year Method

The alternative is to estimate your actual current-year tax liability and pay 90% of that amount across the four quarters. This requires projecting your income and deductions for the full year, which can be challenging if your business has variable revenue.

This method makes sense if your income is significantly lower this year than last year, or if you have good visibility into your annual numbers. But if you underestimate and pay less than 90% of what you actually owe, you'll face penalties.

What's Included in the Calculation

Your estimated tax payments need to cover:

→ Federal income tax on business profits

→ Self-employment tax (Social Security and Medicare) if applicable

Self-employment tax is 15.3% on the first $168,600 of net self-employment income (for 2024), plus 2.9% Medicare tax on amounts above that. This catches many new business owners off guard because it's in addition to income tax.

Don't Forget State Estimated Taxes

Most states with income tax also require estimated payments. The thresholds and due dates vary by state, but generally follow a similar quarterly schedule.

Tennessee doesn't have a state income tax on wages or business income, so Tennessee business owners only need to worry about federal estimated payments. But if you have income from other states or your business operates across state lines, you may have state obligations elsewhere.

What Happens If You Underpay

If you don't pay enough through estimated payments or withholding, you'll owe an underpayment penalty when you file your return. The penalty is essentially interest on the amount you should have paid, calculated from each quarterly due date.

The penalty rate is set quarterly and tied to federal short-term interest rates. In recent years, it's been in the 7-8% range annually, which adds up quickly on large underpayments.

The penalty isn't catastrophic, but it's money you don't need to pay. And more importantly, falling behind on estimated payments usually means a painful catch-up at tax time. Many business owners who skip quarterly payments find themselves facing a five-figure tax bill in April that strains cash flow.

Common Estimated Tax Mistakes

Forgetting self-employment tax. New business owners often calculate their income tax and forget about the additional 15.3% self-employment tax. This can lead to significant underpayment.

Missing the uneven quarters. Because Q2 is only two months, the June 15 deadline sneaks up fast after the April 15 payment. Many business owners miss it simply because they're thinking in calendar quarters.

Not adjusting mid-year. If your income is significantly higher or lower than expected, you can adjust your remaining quarterly payments. Sticking with the original estimate when circumstances have changed leads to either penalties or unnecessary overpayment.

Treating it as optional. Some business owners skip estimated payments thinking they'll just pay everything in April. This works in the sense that the IRS will take your money, but you'll pay penalties for the privilege of waiting.

Making Estimated Payments Easier

The business owners who handle estimated taxes well usually have a system:

Set aside money as you earn it. A common approach is to transfer 25-30% of every deposit into a separate tax savings account. When quarterly payments come due, the money is already there.

Put the due dates on your calendar. April 15, June 15, September 15, January 15. Add reminders a week before each deadline.

Review quarterly with your tax preparer. A mid-year check-in can help you adjust payments if your income is tracking higher or lower than expected.

Use IRS Direct Pay or EFTPS. Electronic payment options make it easy to schedule payments in advance and keep records of what you've paid.

Stay Ahead of Your Tax Obligations

Estimated tax payments are one of the most important cash flow considerations for small business owners. Getting them right means no surprises in April and no unnecessary penalties throughout the year.

At Bottomline Capital, we help business owners build financial systems that support proactive tax planning. If you're not sure whether your estimated payments are on track, or if you need help calculating what you should be paying, we're happy to talk through it.

Book a free consultation to discuss your situation.