Editorial · February 23, 2023
Estimated Tax Payments: How and When Small Firms Pay
Estimated tax payments are how self-employed people and small firms pay income tax during the year, instead of all at once in April. When your expected tax bill reaches $1,000 or more at filing time, the IRS generally wants you to pay in four installments. This guide covers who must pay, the due dates, the rule that avoids a penalty, and how to pay online.
Who has to make estimated tax payments
Taxes are pay-as-you-go. An employee has tax taken out of each paycheck. Income with no tax taken out, such as profit from your own business, needs another route.
The IRS says individuals, including sole proprietors, partners and S corporation shareholders, generally must make estimated tax payments if they expect to owe $1,000 or more when the return is filed. Corporations generally must pay if they expect to owe $500 or more. The payments cover income tax and also self-employment tax.
You may not need to pay at all. Per the 2023 Form 1040-ES, you are off the hook if you were a U.S. citizen or resident alien all of 2022, your 2022 return covered a full 12 months, and you had no tax liability for that year. Employees with a side income can sometimes skip estimated payments by asking their employer to withhold more, using Form W-4.
The four due dates for the 2023 tax year
The year is split into four payment periods, and each has its own due date. For individuals on a calendar year, the 2023 Form 1040-ES lists these dates:
- First payment: April 18
- Second payment: June 15
- Third payment: September 15
- Fourth payment: January 16 of the following year
The dates do not fall every three months, so mark them on a calendar now. If a due date lands on a Saturday, Sunday or legal holiday, the payment is on time if you make it on the following business day. A mailed payment counts as paid on the date of its postmark.
The form adds one useful break. You can skip the January payment if you file your return by January 31 and pay the full balance due with it. You may also pay the whole year at once on the first due date, or split it into four equal parts.
How to avoid an underpayment penalty
You can owe a penalty for paying too little, or too late, even if you are due a refund when you file. The IRS gives a simple test. Most taxpayers escape the penalty when the balance due, after withholding and credits are subtracted, is under $1,000. The penalty also does not apply to those who paid at least 90% of the current year's tax, or 100% of the tax shown on the prior year's return, whichever is smaller.
The second route is called a safe harbor. It is handy when income is hard to predict. If last year's total tax was $18,000, paying $18,000 across the four installments meets the 100% test, even if this year turns out far better. The prior-year return must cover a full 12 months.
Higher earners face a tougher number. If your adjusted gross income for 2022 was more than $150,000 ($75,000 if you are married filing separately), the 2023 Form 1040-ES says to use 110% of last year's tax in place of 100%. Farmers and fishermen who earn at least two-thirds of their gross income from farming or fishing use 66 2/3% in place of 90%, and have different rules and dates.
How to figure what you owe
Individuals use the worksheet in Form 1040-ES. You estimate your income, deductions and credits for the year, work out the tax, and divide it into payments. Last year's return is a good starting point, since it shows your usual income and deductions.
Self-employed people should plan for self-employment tax as well. The form tells you to use 92.35% of your net profit when you figure it. A small firm owner who only budgets for income tax is often short at filing time.
Your estimate does not have to be perfect, and it can be fixed. If your income runs higher or lower than you planned, fill in the worksheet again and adjust the remaining payments. If your income is uneven, such as a seasonal business with a large summer, Publication 505 explains the annualized income installment method. It matches payments to when you actually earn the money, and you file Form 2210 with Schedule AI to use it.
How to pay estimated tax online
You can mail a check with a Form 1040-ES voucher, but paying online is faster and leaves a record. The IRS lists these options on its payments page:
- Your IRS online account, which also shows your payment history
- IRS Direct Pay, a free transfer from a checking or savings account
- A debit or credit card, through an outside processor that charges a convenience fee
- The Electronic Federal Tax Payment System (EFTPS), which the IRS calls the easiest way for individuals and businesses to pay federal taxes
Corporations must use EFTPS to deposit their payments. You can also pay in smaller amounts weekly, every two weeks or monthly, as long as you have paid enough by the end of each quarter.
Keep a note of every payment, with the date, the amount and the confirmation number. You will need the total when you file.
A short plan for a small firm
Start with last year's tax bill. Work out whether the 100% or 110% safe harbor applies, and divide that sum by four. Put the four dates in your calendar with a reminder a week ahead. Move that money into a separate account as sales come in, so the payment is never a surprise.
If a tax professional prepares your return, ask for the next year's payment amounts at the same time. Keep each IRS confirmation with your books. This is general information only. A CPA or enrolled agent can tell you how these rules fit your own return, since rules differ for farmers, fishermen and higher earners.