Estimated Taxes for Self-Employed People and Business Owners

When you work for an employer, tax is withheld from each paycheck. When you are self-employed or own a business that passes its profit through to you, nothing is withheld, and the IRS expects you to pay during the year through estimated tax payments.

Who generally needs to pay them

• Self-employed people and independent contractors
• Owners of partnerships, LLCs taxed as partnerships or sole proprietorships, and S corporation shareholders, on their share of profit
• People with significant income that has no withholding, such as rental income, interest, dividends or capital gains

The usual test is whether you expect to owe a meaningful amount of tax after subtracting withholding and credits. If so, estimated payments are generally required.

The quarterly dates

For a calendar-year taxpayer, payments are generally due in four installments: April 15, June 15, September 15 and January 15 of the following year. When a date falls on a weekend or holiday it moves to the next business day. The periods are not equal quarters, which surprises many people.

What counts toward the tax

Your estimate should cover income tax and, if you are self-employed, self-employment tax (Social Security and Medicare). Many people forget the second part.

How to avoid an underpayment penalty

The IRS has "safe harbor" rules. In general, you avoid the penalty if you pay at least a certain percentage of this year's tax or at least a percentage of last year's tax, spread across the installments. The percentages depend on your income, so check the current rules or ask a tax professional.

Practical tips

• Set money aside from each payment you receive, rather than waiting for the due date
• Use your bookkeeping to see your year-to-date profit, then estimate the tax on it
• Recalculate when your income changes substantially
• Keep a record of every payment you make, including the date and the amount

State estimated taxes

Many states with an income tax have their own estimated payment rules and dates. Texas does not have a state individual income tax, but if you earn income in another state you may have a payment due there.

Estimated taxes are one of the most useful things to plan during the year. If you are not sure how much to pay, a planning conversation can replace guesswork with a number.