The Short Answer

What Are Quarterly Estimated Taxes?

Estimated taxes are payments of income and self-employment tax made during the year by people whose income is not subject to withholding, such as sole proprietors, partners, and S corporation shareholders.

How to handle them: ask your CPA what share of profit to set aside, move that share into a separate tax account every week, and pay from that account on the federal and state due dates. Federal estimates are generally due four times a year. Check the current dates on the IRS estimated taxes page and your state’s tax site.

Dreading the Next Tax Bill?

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In Plain English

Paying Your Taxes as You Go

If no one withholds tax from your pay, you pay it yourself, a little at a time, through the year.

A surprise tax bill in April can wipe out a good year. Paying as you go turns one big shock into four planned payments.

A Real-World Example

The Photographer With Her Best Year Ever

Illustrative example

A freelance photographer in Chicago, Illinois has her best year ever and spends it. In April, she owes the whole year’s tax at once, plus a penalty for paying late.

The next year, she moves a set share of every client payment into a separate tax account and pays four times a year. April becomes just another month. If you run a photography business, set up the tax account before the busy season starts.

From Dr. Paul’s Fabled Forest

Startup Steve and the Letter From the Tax Office

Doctor Owl was waiting for a prescription at the forest pharmacy when Startup Steve swung in on a vine, waving a letter from the forest tax office.

“Doc, they say I owe a whole season’s worth of coins!” Steve said. “I spent them. New barber chair. And there’s this juice bar idea. This one’s the one!”

Doctor Owl read the letter twice. Then he took a scrap of paper from the counter and drew a small jar. Across the front he wrote: Not Steve’s.

“Every time you finish a haircut,” he said, “a share of the coins goes in this jar. The same day. Before the juice bar. Before anything.”

Steve set the jar on the shelf by his mirror. By the next season, the tax letter came, and the jar was ready for it. The juice bar idea could wait.

Find the rest of the forest’s lessons in Dr. Paul’s Fabled Forest Business School Series. This one is from Book 2.

Dr. Paul’s Insight

Dr. Paul is not a tax preparer; he refers tax questions to a CPA. His part is building the set-aside into the cash plan.

Put It to Work

How to Stay Ahead of Estimated Taxes

  1. Ask your CPA what share to set aside. This page uses 28 percent of profit as an illustrative figure only. Your number depends on your income, entity, and state.
  2. Open a separate tax savings account. Money you can see in the main account is money you will spend.
  3. Move that share in every week. Do it before anything else gets spent, including your own draw.
  4. Calendar the due dates for the year. Federal estimates are generally due four times a year. Pull the exact dates from the IRS and your state each year.
  5. Pay from the tax account only. If the tax account comes up short, you know early and can adjust the set-aside.

Tax rules vary by entity and state. Confirm your amounts and dates with a tax professional.

Watch Out

Pitfalls When Planning for Estimated Taxes

Watch OutSpending the tax money

If it sits in the main account, it looks like money you can use.

Watch OutGuessing the set-aside percentage

Too low and April still hurts. Ask your CPA for a number.

Watch OutMissing a payment date

Late payments can bring penalties, even if you pay in full later.

Watch OutForgetting state estimated taxes

Many states expect estimated payments too, on their own schedule.

Why It Matters

Benefits of Planning for Estimated Taxes

  • Fewer April surprises
  • A smaller chance of penalties
  • Steadier cash flow
  • A tax line in the plan that matches reality

In Your Business Plan

How Estimated Taxes Shows Up in a Business Plan

Lenders notice when a plan forgets taxes. A short tax section shows the owner has planned for the bill before it arrives.

Sample plan excerpt: Financial Plan, Taxes

“The projections set aside 28 percent of net profit for federal and state taxes, transferred weekly to a dedicated tax account and paid quarterly, per the advice of the company’s CPA.”

Keep Learning

Related Lessons

Chapter 9How Much to Set Aside for Taxes GlossarySmall Business Accounting and Finance Glossary GuideSmall Business Accounting and Finance: 20 Foundations TermWhat Is an Owner’s Draw? TermWhat Is a General Ledger? GuideThe 13-Week Cash Flow Forecast

FAQ

Questions Owners Ask About Estimated Taxes

Who has to pay quarterly estimated taxes?
Generally, people who expect to owe tax that is not covered by withholding, such as sole proprietors, partners, and S corporation shareholders. The IRS sets the exact thresholds, and your CPA can tell you whether they apply to you.
What happens if I miss an estimated tax payment?
The IRS may charge a penalty for underpaying during the year, even if you pay the full amount when you file. Pay as soon as you can, and ask your CPA about adjusting the next payment.
How much should I set aside for taxes?
There is no single right percentage. It depends on your profit, your entity, your state, and your deductions. Ask a CPA for your number, then set it aside from every payment you receive.

More From the Series

Keep Building Your Business

Every book in Dr. Paul’s Fabled Forest Business School Series teaches one subject through short stories, real terms, and one-page worksheets.

Management and Leadership for Small Businesses book coverBook 1Management and Leadership for Small BusinessesGet it on Amazon → Operations for Small Businesses book coverBook 3Operations for Small BusinessesGet it on Amazon → Strategy for Small Businesses book coverBook 6Strategy for Small BusinessesGet it on Amazon →

Dr. Paul Borosky, DBA, MBA

Dr. Paul is a business consultant and author with 14+ years of experience and 1,000+ written business plans. He works with owner-run small businesses on plans, financial projections, and the systems that let a business run without the owner doing everything. This page is part of the glossary for Accounting and Finance for Small Businesses, Book 2 of Dr. Paul’s Fabled Forest Business School Series.

This page is for general educational purposes only. It is not tax, legal, or accounting advice. Tax rules change and vary by entity and state. Confirm your own amounts and dates with a CPA or other tax professional.