Chapter 4 · Quarterly Estimates
Because no employer withholds for you, you pay taxes four times a year. Here's how quarterly estimated payments work and why they stop you owing a surprise bill.
Learning objectives
- Understand why self-employed owners pay quarterly, not yearly.
- Know the payment schedule and how to figure the amount.
- Avoid the underpayment penalty by planning ahead.
Why quarterly
When you were an employee, your employer withheld income + payroll taxes from each paycheck and sent them to the IRS throughout the year. As a business owner you have no one to withhold — so the IRS wants you to "pay as you go" with four estimated payments a year. If you wait and pay it all at tax time, you owe an underpayment penalty on top of the tax. Quarterly payments avoid that.
The schedule
The four estimated payment due dates (approximate standard calendar — confirm current-year dates):
| Payment | Typical due date | Covers income from |
|---|---|---|
| Q1 | Apr 15 | Jan–Mar |
| Q2 | Jun 15 | Apr–May |
| Q3 | Sep 15 | Jun–Aug |
| Q4 | Jan 15 (next year) | Sep–Dec |
Most states also want quarterly estimated payments for state income tax — check with your state's revenue department. Don't federal-only and forget the state surprise.
How to figure the amount
The simple, safe method for a new business: estimate your profit and pay in advance.
- Estimate yearly net profit (revenue − expenses) — use your projections from Vol 1.
- Convert to estimated tax owed — income tax (your bracket) + self-employment tax (~15.3%).
- Divide by 4 and pay that each quarter (adjust up as actual profit grows).
A CPA or tax software will compute this for you. If your actual profit is higher than estimated, bump the payment up; if lower, you can reduce (and reconcile at filing).
The "safe harbor" shortcut
To avoid the penalty, you generally need to have paid at least 100% of last year's tax (or 90% of this year's, whichever is lower). If last year was low/zero (your first year), the rule is easier. Your CPA can explain the exact safe-harbor number and confirm you're covered.
The cash-management habit (most important)
The way owners fail here isn't the math — it's spending the tax money. The fix is mechanical:
Every month, move ~30–40% of business net profit into a separate savings account you never touch except to pay taxes. For federal alone, ~25–35% of profit is the common set-aside (income + self-employment tax); add state tax on top (in a state like California the combined safe target is often ~30–40%). Then quarterly estimates write themselves. Treat that money as the government's, not yours. This single habit prevents 90% of small-business tax disasters.
Combine this with your separated business account (Vol 6 · ch 1): revenue in, ~30–40% out to the tax bucket (or ~25–35% if you're in a no-state-income-tax state), rest covers rent/prizes/profit. A CPA nails your exact target.
Summary
Because no one withholds for you, pay federal (and state) quarterly estimated taxes on your profit — ~25–35% of net profit divided into four payments. The real killer isn't the math; it's spending the money. Set aside ~30% of profit monthly into a tax bucket you don't touch, compute estimates with a CPA/software, use the safe-harbor rule to avoid penalties, and you'll never face a surprise bill.
Checklist
- ☐ Confirmed the current-year quarterly due dates (federal + state).
- ☐ Estimated yearly profit and computed quarterly payment amounts (with CPA/software).
- ☐ Opened a separate savings "tax bucket" and move ~30% of profit in monthly.
- ☐ Set calendar reminders for the 4 quarterly payments.
- ☐ Used the safe-harbor rule to avoid underpayment penalties.
Looking ahead
Your money and taxes are handled. The final Volume 7 grounds it all in reality — real success stories, real failures, and a concrete plan to launch.