Skip them and the IRS adds underpayment penalties. Pay too much and you’ve loaned the IRS money interest-free. Here’s how to size them right and the safe harbor that protects you from penalties either way.
If you’re self-employed — sole prop, single-member LLC, partner, or S-Corp owner — you’re responsible for making estimated tax payments four times a year on income earned. Skip them and the IRS adds underpayment penalties.
The first April after going independent, contractors typically file their return, see they owe $15,000 federal plus $5,000 state, and discover the underpayment penalty added $400–$800 on top. That penalty isn’t deductible. It’s pure waste.
| Period | Due |
|---|---|
| Jan 1 – Mar 31 | April 15 |
| Apr 1 – May 31 | June 15 |
| Jun 1 – Aug 31 | September 15 |
| Sep 1 – Dec 31 | January 15 (next year) |
Quarters are not equal — Q2 covers only April and May. Q4 covers September through December. Catches people off guard.
Method 1: Safe harbor (easiest). 100% of prior year’s total tax in four equal payments (110% if prior AGI over $150k). Doesn’t matter if this year is a banner or terrible year — safe harbor protects from penalties.
Method 2: 90% of this year’s tax. Pay 90% of what you’ll owe this year. Works best with predictable income.
Method 3: Annualized income installment. If income is irregular (all in Q3), use Form 2210 to base each payment on income actually earned that quarter.
Set aside 25–30% of every dollar of net business profit for taxes: ~15.3% SE tax, ~12–18% federal income tax, ~2–10% state income tax. Higher earners and higher-tax states should target 35–40%.
Federal: IRS Direct Pay (irs.gov/payments) — free, from your bank account. EFTPS — also free, more features. Credit/debit card works but charges ~2% fees. Each state has its own system (California: FTB Web Pay; New York: Online Services).
IRS calculates underpayment penalty at year-end on Form 2210. Rate is short-term federal rate + 3 percentage points (~8% annualized in 2024). On a $5,000 underpayment for one quarter, the penalty is ~$100. Not bankrupting, but stacks across quarters.
Separate tax bank account. Every client payment, transfer 25–30% of the net to the tax account. Use last year’s tax as baseline. Safe harbor protection is worth more than the small interest savings of underpaying. Don’t forget SE tax — many contractors think 22% then forget the 15.3% on top. Total marginal rate is closer to 37%.
If you owe $1,000+ at tax time and didn’t make quarterly payments — even if you can afford to write a check — the underpayment penalty still applies. The IRS wants the money throughout the year.
Federal income tax withheld from your S-Corp wages counts as if it were paid evenly throughout the year — protecting against underpayment penalties even if withholding happened in December. Useful strategy: when unexpectedly profitable, adjust your December W-2 withholding upward to catch up.
Foad is a federally licensed Enrolled Agent who writes about tax and bookkeeping for small businesses.