The first year I ran my own business I got a letter from the IRS in February telling me I owed $14,000 and also owed a penalty for not paying through the year. I remember staring at that letter thinking there had to be a mistake. There wasn't. I just didn't know how this worked.
If you're self-employed and expect to owe more than $1,000 in federal taxes for the year, you're required to make quarterly estimated payments. Most new business owners find out about this the hard way.
When They're Due
The IRS calls them quarterly but the schedule is a little odd. Q1 covers January through March, due April 15. Q2 covers April and May, due June 15. Q3 covers June through August, due September 15. Q4 covers September through December, due January 15 of the following year. Mark those dates. Missing them means penalties even if you pay everything by April.
How Much to Pay
The safe harbor rule is the easiest approach: pay 100% of last year's total tax liability, spread evenly across four payments. If you paid $20,000 in taxes last year, pay $5,000 per quarter this year. Even if your income is much higher this year, you won't owe an underpayment penalty as long as you hit last year's number. (High earners above $150,000 use 110%.)
The more accurate method is estimating your current year income and paying 25% of what you'll owe each quarter. This is better if your income is volatile or if this year is significantly different from last year. Requires more math and more attention but keeps you from overpaying.
The Easiest Way to Handle It
Open a separate savings account. Every time a customer pays you, move 25-30% into that account. Don't touch it. When quarterly payments are due, the money is sitting there waiting. You don't have to scramble. You don't have to borrow from next month's payroll.
The 25-30% covers federal self-employment tax (15.3% on net profit) plus federal income tax. Depending on your state, add another 3-8% for state taxes. It sounds like a lot until you remember that employees have this taken out automatically. You're just doing it yourself.
Pay online at IRS.gov using Direct Pay or EFTPS. Keep the confirmation numbers. Your accountant will want them at year-end.
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Written by
Dina Good
Founder, WerkOps
Dina grew up in the trades. Her father was a contractor, then a building inspector, and the job site was her classroom long before any formal one was. She went on to own her own contracting company, which is where she first felt the pain of running a skilled trade business on bad software and worse spreadsheets. A love of data pulled her into programming, and the two worlds eventually collided into WerkOps - software built by someone who has actually been on the truck.