A Guide to Small Business Quarterly Taxes for the Self-Employed

Small business quarterly taxes are a common challenge for the self-employed. The Internal Revenue Service (IRS) collected $7 billion in penalties related to estimated tax payments in Fiscal Year 2023, impacting more than 14 million taxpayers.

If you’re self-employed, here’s what you should know about quarterly taxes to stay in compliance with IRS regulations, including what they are, when you have to pay them, and how to calculate them.

What are small business quarterly taxes?

Small business quarterly taxes, or estimated taxes, are payments you may have to make if you collect self-employment income. They’re due roughly every quarter and go toward the income, Social Security, and Medicare taxes you owe annually.

The IRS uses a “pay as you go” system in which everyone has to pay taxes as they earn income. Employees don’t have to worry about making payments manually because their employers withhold taxes from their paychecks and send the amounts to the IRS on their behalf.

However, your customers or clients generally won’t withhold taxes from the payments that constitute your self-employment income. As a result, you’re responsible for making them yourself in the form of quarterly tax estimates.

Do you have to pay quarterly taxes?

You generally have to pay quarterly taxes if you expect to owe more than $1,000 in annual income and self-employment taxes due to business activities. That can be anything from running a full-time operation to driving for DoorDash on the weekends.

If you expect to owe less than $1,000 in annual taxes, you may not have to make quarterly tax payments. For example, if your business only earned enough to trigger $600 in taxes, you wouldn’t be required to pay quarterly; you could pay the entire $600 when you file your tax return.

What if you have W-2 and self-employment income?

If you collect W-2 wages and self-employment income, you may be able to avoid the quarterly tax requirement, depending on how much you earn. This is because taxes are already withheld from the W-2 portion of your income.

For example, say you made $15,000 in 2023 from a part-time W-2 job at a grocery store and $10,000 from freelance writing. That combined income caused you to owe a total of $5,000 in taxes for the year. If you had $4,100 in taxes withheld from your paychecks at your grocery store job, you’d only have to pay an additional $900 on your own. 

Since that $900 is below the $1,000 requirement after, you wouldn’t be required to pay additional taxes quarterly. Instead, you could pay that $900 at any point before Tax Day of the following year.

What if you file jointly with a partner?

Your joint tax return may also help you avoid the requirements for quarterly taxes. If you’re self-employed, but your partner has a W-2 job, their employer may withhold enough taxes to cover your joint tax liability.

How to calculate quarterly taxes for a small business

Determining how much to pay in small business quarterly taxes is a critical aspect of tax planning. You want to pay in enough to avoid penalties but not so much that you deprive yourself of capital unnecessarily during the tax year.

To find that sweet spot, you have to project your taxable earnings for the coming year, calculate your income and self-employment taxes, and then divide the total into four estimated payment amounts.

Here’s a step-by-step guide to help you navigate the process.

Step 1: Estimate your taxable income

Begin by estimating your total revenue for the year. This includes all earnings from your freelance business or self-employment work, plus any other income sources, like investments or rental income. Next, factor in your tax-deductible business expenses, as they can significantly lower your taxable income.

Step 2: Project your federal tax liability

Once you've estimated your taxable income, use the income tax rates to determine your federal tax liability. Remember, income tax rates depend on factors like gross income, filing status, and whether you’re itemizing deductions or taking the standard deduction. 

Once you’ve estimated your income tax, add your self-employment taxes to it, which covers Social Security and Medicare. It’s a flat 15.3% tax rate and applies to 92.35% of your net income from self-employment.

Together, these numbers give you your total estimated taxes. For instance, if your estimated income tax is $5,000 and your estimated self-employment tax is $3,000, your total estimated tax bill for the year is $8,000.

Step 3: Break out your quarterly payments

If your estimated annual tax liability exceeds $1,000, you generally have to make quarterly tax payments. Divide the total by four to get your quarterly payment amount. For example, if you owe $8,000 for the year, your quarterly payments should be equal installments of $2,000.

Safe harbor estimated tax rules

Self-employed quarterly taxes are often based on estimates, and it’s tough to predict how much you’ll owe for a given year down to the dollar. As a result, the IRS has safe harbor rules that may allow you to avoid underpayment penalties, depending on your total estimated payments.

Specifically, the IRS states that “most taxpayers will avoid this penalty if […] they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.”

In other words, you don’t have to pay exactly what you owe to satisfy the IRS. You just need to pass one of the following tests:

• You paid at least 90% of the taxes that you owe for this year

• You paid 100% of your taxes owed in the previous year

If you owe $2,000 in taxes in 2024 but make quarterly payments of $1,800 throughout 2024, you’ve underpaid—but you’re okay because you paid 90% of what you owed. Similarly, if you owed $2,000 in 2024 and $1,500 in 2023, you’re safe as long as you pay $1,500 during 2024 since that’s 100% of the previous year’s taxes.

Since you can find your previous year’s tax liability on your tax return, you can always use it as your benchmark to avoid penalties. If you’re still worried, consider hiring a Certified Public Accountant to calculate your estimated taxes and help you make your quarterly payments.

When are quarterly taxes due?

You’re required to make quarterly tax payments four times per year, but not exactly every three months. Here are the actual due dates:

• 1st Payment: Due April 15, for income earned from January 1 to March 31.

• 2nd Payment: Due June 15, for income earned from April 1 to May 31.

• 3rd Payment: Due September 15, for income earned from June 1 to August 31.

• 4th Payment: Due January 15 of the following year, for income earned from September 1 to December 31.

If these dates fall on a weekend or a holiday, the due date is the next business day. It’s a good idea to mark those tax deadlines in your calendar to avoid missing a payment or forgetting to save for one.

Speaking of saving for quarterly taxes, a good rule of thumb is to set aside roughly a third of your income for estimated payments.

What happens if you miss a quarterly estimated tax payment?

If you miss a quarterly estimated tax payment, the IRS may charge you a penalty. It’s based on the amount you underpaid and the period of the underpayment (how many days it lasted and when they occurred).

The penalty accrues daily at an annual interest rate that the IRS updates each quarter. For example, the underpayment rate for January to March 2024 is 8%, up from 3% in January to March 2022.

Remember, you may avoid this penalty by satisfying one of the safe harbor tests.

How to pay small business quarterly taxes

While you can still technically pay your small business quarterly taxes by mail, the IRS is doing its best to go paperless. Electronic methods are much more efficient anyway and significantly reduce processing times.

Here are some of the best electronic options for paying your estimates:

• Found app: If you use Found for your business banking and file a Schedule C, you can make in-app quarterly federal tax payments as a Found Plus subscriber.  

• IRS Direct Pay: Direct Pay is a secure service on the IRS website. It allows you to pay directly from your bank account without any fees. You simply enter your tax information, verify your identity, and authorize the transaction.

• IRS2Go mobile app: If you have IRS2Go on your mobile device, you can make estimated quarterly tax payments that way too. You can use your bank account or pay with a credit card or debit card. Just be mindful of the 2% processing fee.

• Electronic Federal Tax Payment System (EFTPS): This government-run system offers high security for your tax payments. You have to enroll in EFTPS, after which you can schedule and make payments online or by phone.

Note that you’re not limited to one estimated payment per quarter. You can make as many payments as you need to pay in the necessary amounts before the due date.

Found makes estimated tax payments easy

Found is a platform designed to simplify self-employment, including small business quarterly taxes. It can automatically set aside a portion of your income for estimated payments in a separate “pocket” within your bank account, helping ensure you always have enough to cover what you owe.

You can let Found’s smart percentage feature estimate your tax liability and update itself accordingly, or set a fixed rate to better suit your needs. If you subscribe to a Found Plus account, you can even submit your payments directly from the platform.

Sign up for Found today and automate your quarterly taxes!

FAQ

What are quarterly taxes for a business?

Small business quarterly taxes are the mechanism by which self-employed people pay income and self-employment taxes throughout the year. If you don’t have an employer who withholds those taxes from your earnings, you’re responsible for sending the proper amounts to the IRS and your state tax agency, if applicable.

Do you have to pay quarterly taxes your first year?

If you expect to owe at least $1,000 to the IRS, you generally have to pay quarterly taxes, even in your first year of self-employment. Doing so is beneficial anyway to help prevent you from facing an unaffordably large tax bill at the end of the year.

To avoid underpayment penalties, make sure your combined withholdings and estimated taxes cover at least 90% of your current year’s tax liability or 100% of the previous year’s.

What happens if you pay estimated taxes late?

If you pay estimated taxes late, you may trigger a penalty that accrues daily at an IRS-determined rate until you pay off your balance. The IRS updates the underpayment penalty rate quarterly, and it’s been 8% since the start of 2024.

What is the safe harbor rule for estimated tax payments?

The safe harbor estimated tax rules state that you’re safe from underpayment penalties if your estimated payments and tax withholding equal at least one of the following:

• 90% of the taxes you owe for the current year

• 100% of the taxes you owed the previous year

However, that doesn’t necessarily mean you’re safe from late payment penalties. For example, if you owe $10,000 and pay $9,000 just before the third estimated tax payment, you reach the underpayment safe harbor, but you may still owe penalties for missing the first two estimated payments.

The information on this website is not intended to provide, and should not be relied on, for tax advice.