Quarterly Taxes Aren't Optional: How to Know What You Should Actually Be Paying

Self-employed and S-Corp owners often assume a refund means they're in the clear, but underpayment penalties can still apply. This article breaks down how estimated tax payments actually work, what the IRS safe harbor really protects you from, and why current bookkeeping is essential for accurate tax planning.

It doesn't even seem possible, and yet it happens more often than you might think.

You overpaid your taxes enough to get money back. So how could you also have underpaid them?

Welcome to Schrödinger's tax payment.

That's usually when I hear: "What is this underpayment penalty on my tax return? I'm getting a refund!"

The answer is that the IRS cares about two different things: how much tax you paid and when you paid it.

The federal income tax system is pay-as-you-go. That means you're generally expected to pay tax throughout the year as you earn income.

If you're an employee, you may barely notice this happening. Your employer withholds federal income tax from each paycheck and sends it to the government on your behalf.

When you're self-employed, there isn't an employer doing that for you.

That's where estimated tax payments come in.

Curious if an S Corp is right for you?

Try the Lettuce Tax Calculator to see how much more you can take home each year.

See your savings

They're Not Really Quarterly

Most of us call them quarterly estimated tax payments. They're not quite quarterly.

Federal estimated tax payments are generally due:

• April 15
• June 15
• September 15
• January 15 of the following year

The actual dates can shift when a due date falls on a weekend or holiday.

Why those four dates aren't spaced three months apart is a question for someone with more insight into the mind of Congress than I have.

The important part is that you generally can't wait until you file your tax return the following year to pay all of the tax you owe without potentially paying a price for waiting.

Suppose your tax liability for the year ultimately comes to $36,000.

Writing a $36,000 check the following April doesn't necessarily mean you're fine. The tax system generally expected you to be paying toward that liability during the year.

If you didn't pay enough when required, you may owe an underpayment penalty even if you eventually paid the entire tax bill.

And yes, under the right circumstances, you can even end up with an underpayment penalty on a return that shows a refund.

You paid enough.

You just didn't pay enough at the right times.

"But My S Corp Earned the Money"

This is especially confusing for owners of pass-through businesses.

An S Corp generally doesn't pay federal income tax on its ordinary business profit. Instead, the income passes through to the shareholders, who report their shares on their personal tax returns.

Partnerships generally work similarly.

That means your business can earn the income while you personally owe the federal income tax on it.

This can create another surprise.

The amount of cash you take out of your S Corp isn't necessarily the amount of taxable income you have from the S Corp.

Your business could earn $150,000 and leave a significant amount of that cash sitting in the company. You can still owe tax on your share of the $150,000 of taxable business income.

That's why estimated-tax planning for a business owner needs to look beyond how much money was transferred into a personal bank account.

So How Much Are You Supposed to Pay?

This is where the tax rules give us some help.

There are federal safe-harbor rules that can protect you from an underpayment penalty if you pay enough tax during the year.

Generally, one safe harbor is based on paying at least 90% of the tax you ultimately owe for the current year.

Another commonly used safe harbor is based on your prior-year tax.

Generally, you can avoid an underpayment penalty by paying 100% of the prior year's tax during the current year. For higher-income taxpayers, that percentage generally increases to 110%.

That prior-year safe harbor can be extremely useful because it gives you a number you actually know.

But there's an important distinction:

Avoiding an underpayment penalty is not the same thing as paying enough to cover your tax bill.

Suppose last year was an average year and this year your business takes off.

You might make the required payments based on last year's tax and completely satisfy the safe-harbor rules.

Congratulations. You've avoided the underpayment penalty.

You could also still owe a very large tax bill when you file your return.

Safe harbor answers one question: How much do I need to pay during the year to avoid an underpayment penalty?

It doesn't necessarily answer another question.

"How Much Am I Actually Going to Owe? 'I Heard I Should Just Save 30%'"

This is one of those rules of thumb that isn't necessarily terrible advice.

If you just started working for yourself and have absolutely no idea what your tax liability will be, putting 30% of every payment into a separate savings account is probably better than spending 100% and hoping for the best.

But 30% of what? Your gross revenue? Your net business profit? Your S Corp distributions? Your salary? And what else is happening on your tax return?

Maybe your spouse has a W-2 job with substantial withholding. Maybe you have rental income. Maybe you sold stock. Maybe you're making retirement contributions. Maybe your business has grown dramatically.

Maybe it has lost money.

Two self-employed people with businesses producing exactly the same profit can have very different tax liabilities.

A rule of thumb is useful when you don't have better information.

Once you have actual numbers, use the actual numbers.

And if you extend your tax return, remember that an extension gives you more time to file, not more time to pay. Any tax you still owe is generally due by the original filing deadline. If it isn't paid by then, interest, and potentially other penalties, can begin to accrue even though you properly extended the return.

That's why "I met the safe harbor" and "I'm fully paid in for the year" are two very different statements.

"I'll Just Catch Up at the End of the Year"

You can certainly make an estimated tax payment later in the year.

But making a large payment in December or January doesn't necessarily erase an underpayment that occurred earlier in the year.

That's because the underpayment calculation looks at whether sufficient tax was paid for the required installment periods.

There's an important exception when your income really wasn't earned evenly throughout the year.

Suppose you're a consultant who earns very little during the first six months and then lands a huge project in October.

You didn't have the October income in April.

The tax rules include an annualized income installment method that can take uneven income into account. It's more complicated than simply dividing your annual income by four, but in the right circumstances it can reduce or eliminate a penalty that would otherwise make it appear you should have paid tax before you earned the income.

Again, the facts matter.

Withholding Has an Interesting Superpower

There's another planning wrinkle worth knowing.

Federal income tax withheld from wages is generally treated as though it was paid evenly throughout the year, even if more of the withholding actually occurred later.

That can sometimes make additional withholding late in the year more useful for underpayment purposes than making an estimated tax payment for the same amount at the same time.

For an S Corp owner who receives reasonable compensation through payroll, for example, increasing federal withholding later in the year may sometimes be part of the planning discussion.

That's not a universal tax hack, either.

It's simply another example of why when and how you pay can matter as much as the amount you pay.

Your Books Should Be Able to Tell You What's Happening

So, what should you actually be paying?

To answer that question, somebody needs current information.

How much revenue has your business earned so far?

What are the actual expenses?

What's the profit?

Is profit increasing or decreasing?

How much has been paid through payroll?

How much tax has already been withheld or paid through estimates?

Are there significant changes elsewhere on your tax return?

This is where current bookkeeping becomes part of tax planning.

Good bookkeeping doesn't calculate your entire personal tax return. But it provides the current business numbers you need to make a meaningful tax projection.

If it's September and your books were last updated in March, you're not estimating your taxes. You're guessing.

And that brings us back to the person staring at a tax return and asking:

"How can I owe an underpayment penalty when I'm getting a refund?"

Because estimated taxes aren't an extra tax, and they're not a punishment for being self-employed.

They're how a pay-as-you-go tax system collects tax during the year when an employer isn't withholding enough of it for you.

You don't need a magic percentage.

You need to know what your business is actually earning, what else is happening in your tax picture, what you've already paid and what the tax rules require you to pay, and when.

The best estimated tax payment isn't 25%, 30% or whatever number someone gave you on social media.

It's the payment based on what's actually happening in your business and your life.

Frequently Asked Questions About Quarterly Estimated Taxes

Do Self-Employed People Have to Pay Quarterly Estimated Taxes?

Self-employed people generally need to make estimated tax payments during the year if they expect to owe enough tax that isn't covered by withholding or other payments. The federal income tax system is pay-as-you-go, so taxes generally must be paid as income is earned rather than waiting until the tax return is filed.

When Are Federal Quarterly Estimated Tax Payments Due?

Federal estimated tax payments are generally due April 15, June 15, September 15 and January 15 of the following year. The dates may shift when a deadline falls on a weekend or federal holiday.

Despite the name, the four payment periods aren't evenly spaced calendar quarters.

Can I Owe an Underpayment Penalty Even if I'm Getting a Tax Refund?

Yes. The IRS considers both how much tax you paid and when you paid it.

You can ultimately have paid more tax than you owe and receive a refund, while still having underpaid during an earlier required installment period.

That's why an underpayment penalty can sometimes appear on a tax return that shows a refund.

What Is the Safe Harbor for Estimated Tax Payments?

Generally, taxpayers can avoid the federal estimated-tax underpayment penalty by paying at least 90% of the current year's tax or 100% of the prior year's tax. For certain higher-income taxpayers, the prior-year percentage generally increases to 110%.

Other requirements and exceptions can apply, so the safe harbor should be evaluated based on your particular circumstances.

If I Meet the Estimated-Tax Safe Harbor, Does That Mean I Won't Owe Taxes When I File?

No. Meeting a safe harbor can protect you from an estimated-tax underpayment penalty, but it doesn't necessarily mean you've paid your entire tax liability.

If your income increased significantly from the prior year, you could satisfy the prior-year safe harbor and still owe a substantial balance when you file your tax return.

Does Filing an Extension Give Me More Time to Pay My Taxes?

No. A federal income-tax filing extension generally gives you additional time to file your return, not additional time to pay the tax.

Tax that remains unpaid after the original payment deadline can generally accrue interest and potentially other penalties even when the return itself has been properly extended.

Should Self-Employed People Save 30% of Their Income for Taxes?

Saving 30% can be a useful rule of thumb when you don't yet have enough information to make a tax projection, but there is no universal percentage that works for every self-employed taxpayer.

Your actual tax liability can depend on business profit, other household income, withholding, deductions, credits, retirement contributions, investment income and many other factors.

Once you have current financial information, your estimated tax payments should be based on your actual numbers rather than a generic percentage.

Are Estimated Tax Payments Based on Gross Business Revenue or Net Profit?

Business taxes generally aren't calculated simply as a percentage of gross revenue. For a self-employed business owner, net business profit is an important part of the calculation, but your overall tax liability can also depend on income, deductions, credits and payments elsewhere on your individual tax return.

That's why knowing your current business profit is much more useful for tax planning than simply knowing how much money came into the business.

Do S Corp Owners Need to Make Estimated Tax Payments?

They may. An S Corp generally passes its taxable business income through to its shareholders. The shareholder can owe federal income tax on that income even when the corporation doesn't distribute all of the corresponding cash.

An S Corp owner's estimated-tax planning therefore needs to consider pass-through income as well as salary, withholding, distributions and the rest of the owner's individual tax situation.

Can I Make One Large Estimated Tax Payment at the End of the Year?

You can make an estimated payment later in the year, but it doesn't necessarily correct an underpayment from an earlier installment period.

The estimated-tax calculation generally considers whether sufficient tax was paid when required. A large December or January payment therefore may not erase an earlier underpayment.

What if Most of My Income Was Earned Late in the Year?

Taxpayers whose income is uneven during the year may be able to use the annualized income installment method.

For example, if a consultant earned relatively little during the first half of the year and received substantial income late in the year, this method may help demonstrate that the taxpayer wasn't required to pay tax on income before it was actually earned.

Can Increasing Withholding Late in the Year Help with an Estimated-Tax Underpayment?

Sometimes. Federal income tax withholding is generally treated as though it was paid evenly throughout the year, even when much of the withholding actually occurred later.

That can make increased withholding late in the year useful in some circumstances, although whether it works depends on the taxpayer's particular situation.

Why Is Current Bookkeeping Important for Estimated Taxes?

A meaningful tax projection requires current information about business revenue, expenses and profit.

Bookkeeping also helps show how the business is changing during the year. If profits suddenly increase or decrease, estimated-tax payments may need to change as well.

Without current books, a business owner may be making tax payments based on assumptions rather than what's actually happening in the business.

The Bottom Line: How Much Should You Pay in Quarterly Estimated Taxes?

There isn't one percentage or payment amount that's right for every self-employed person.

Your estimated tax payments need to account for what your business is actually earning, what else is happening on your tax return, how much tax you've already paid and when you've paid it.

Safe-harbor rules can help you avoid an underpayment penalty, but they don't necessarily tell you how much you'll ultimately owe. And rules of thumb like "save 30%" can be useful when you don't have better information, but they shouldn't replace a tax projection once you do.

That's why current bookkeeping matters. The better you understand what's happening in your business now, the better you can plan for the taxes that come with it.

The goal isn't simply to avoid a penalty. It's to know what you're likely to owe before the tax bill arrives.

You don't need a magic percentage — you need current numbers. Lettuce automatically tracks your income as it comes in, sets aside what you owe, and calculates and submits your quarterly estimated payments on every deadline (April 15, June 15, September 15, and January 15) so you're never guessing or scrambling in December. For S-Corp owners, Lettuce also manages your reasonable-compensation payroll and keeps your books current year-round, so your quarterly numbers reflect what your business is actually earning, not a rule of thumb from social media. Try Lettuce and get started today!

This article is part of the Tax Strategy Series, featuring in-depth, practical guidance from Diane Kennedy, CPA—bestselling author, strategic tax consultant, and founder of USTaxAid and KennedyTax.tax. Explore the full series and catch every installment here.

Related Articles:

• The Underpayment Penalty Explained And How to Never Pay It Again
• Part 2: The $10,000 Tax Problem: Why Solopreneurs Overpay (and the S Corp Fix)
• I Had My Best Month Ever… So Why Am I Stressed About Taxes?
• Your tax return holds the keys to next year's financial success. Here's how to use them
• How to Calculate Adjusted Gross Income for Freelancers