One of the biggest surprises for someone starting a small business is discovering that there may be no employer withholding taxes from their income. Instead, the business owner may need to make estimated tax payments throughout the year.
This applies to many sole proprietors, independent contractors, freelancers, gig workers, and some LLC owners. The IRS generally requires self-employed individuals with sufficient net earnings to handle their income tax and self-employment tax through estimated payments.
Why Small Business Owners Pay Estimated Taxes
Employees typically have federal income tax withheld from each paycheck. A self-employed person generally doesn’t have that automatic withholding.
Instead, taxes are paid as income is earned. This is why the federal tax system is often described as pay-as-you-go.
Estimated payments can cover both federal income tax and self-employment tax, which includes Social Security and Medicare taxes.
Who May Need to Make Quarterly Payments?
You may need estimated tax payments if you’re operating a business as a sole proprietor, working as an independent contractor, freelancing, or earning other income without enough tax withholding.
For self-employed individuals, the IRS generally requires a federal income tax return when net earnings from self-employment reach $400 or more, although other filing rules can also apply.
Having an LLC doesn’t automatically mean you pay estimated taxes in a particular way. Your business structure and how the business is taxed matter.
When Are Estimated Tax Payments Due?
For most taxpayers using the calendar year, estimated tax payments are generally due:
- April 15
- June 15
- September 15
- January 15 of the following year
If a deadline falls on a weekend or legal holiday, the payment deadline can move to the next business day.
How Much Should You Pay?
This is where many small business owners get into trouble.
Your estimated payment isn’t simply a percentage of your sales. You generally need to consider business income, deductible expenses, taxable income, self-employment tax, credits, withholding from other jobs, and your previous tax situation.
The IRS recommends using Form 1040-ES to calculate estimated taxes. Your previous federal tax return can provide a useful starting point, but you should adjust your estimate when your income or circumstances change.
If business income increases substantially during the year, your estimated payments may need to increase as well.
What Happens If You Don’t Pay Enough?
Underpaying estimated taxes can result in an underpayment penalty, even if you eventually pay the entire balance when filing your annual tax return.
That’s why estimated tax payments shouldn’t be treated as an optional way of paying your tax bill at the end of the year. They are part of the normal tax-payment process for many self-employed taxpayers.
A Simple System Makes This Easier
A practical approach is to keep business finances organized throughout the year.
Track your business income, record deductible expenses, monitor your profit, and set aside money for taxes as you receive payments.
You don’t necessarily have to make the payment exactly once every three months. The IRS notes that taxpayers can make payments more frequently—such as weekly or monthly—as long as enough tax has been paid by the applicable quarterly deadline.
For a growing business, regularly reviewing estimated taxes can also prevent an unpleasant surprise when the annual tax return is prepared.