As another common question small business owners raise at the start, quarterly estimated taxes cause a bit of implicit worry. People have heard the word “penalty,” and they are not sure how much to save or when the money is actually due. The good news is that the system is simpler than it looks. Once you set it up, it mostly runs itself. Here is the whole thing, start to finish.
Do I even have to do this?
Here is the simple test. If you expect to owe at least $1,000 in federal tax for the year after any withholding, you are supposed to pay as you go. That covers most sole proprietors, freelancers, gig workers, partners, and S-corp owners who take profit beyond their paycheck. By law, the federal income tax is pay-as-you-go. You are expected to pay tax as you earn income during the year, not in one lump sum at filing. IRC §6654 backs this up with a penalty if you underpay along the way.
If you also hold a W-2 job, you have a shortcut. You can raise the withholding on that paycheck to cover the tax on your side income. Withholding counts as paid evenly across the year, even if it all lands in December. That one move spares many people the quarterly routine entirely.
How much should I set aside?
Start with a working rule: save 25 to 30 percent of every dollar of profit, not revenue. Profit is what is left after business expenses. Move that money into a separate savings account the day it comes in, and treat it as money you no longer own. For most owners in the lower and middle brackets, 25 to 30 percent covers both income tax and self-employment tax with a little cushion. If you are in a higher bracket or a high-tax state, lean toward 35 percent.
Why so high? Because self-employment tax stacks on top of income tax. Self-employment tax is 15.3 percent of your net earnings: 12.4 percent for Social Security and 2.9 percent for Medicare. For 2026, the Social Security portion applies to the first $184,500 of net earnings. The Medicare portion has no cap. When you had an employer, they paid half of this for you. On your own, you pay both halves.1 You do get to deduct half of your self-employment tax on your Form 1040, which softens the blow a little, but the cash still has to go out the door.
The safe harbor: how to avoid a penalty
You do not have to predict your tax to the dollar. The IRS gives you a safe harbor. Pay one of these amounts in even installments and the underpayment penalty disappears, even if you still owe more at filing time.
Option one: pay 90 percent of what you will actually owe this year. Option two: pay 100 percent of what you owed last year. If your prior-year adjusted gross income was over $150,000, that second number rises to 110 percent. The prior-year option is the safer bet because last year’s number is already known. Take the total tax from last year’s return, multiply by 100 or 110 percent, and divide by four. That is your quarterly target.
One caveat if your income is uneven. The safe harbor assumes four roughly equal payments. So if most of your money arrives late in the year and you pay it all in the final quarter, you can still owe a small penalty for the earlier ones. There is a way to line your payments up with when you actually earned the income, but it adds paperwork, so ask your CPA if your income swings a lot.
When do I send it in?
Estimated taxes are due four times a year. The periods are not even three-month blocks, which surprises people, but the dates are what matter. For the 2026 tax year, the deadlines are:
• First payment: April 15, 2026
• Second payment: June 15, 2026
• Third payment: September 15, 2026
• Fourth payment: January 15, 2027
If a date falls on a weekend or holiday, it shifts to the next business day. Put all four in your calendar now, with a reminder a few days early. A payment counts as on time based on the date you submit it electronically, or the postmark if you mail it.
How do I actually pay?
The easiest free method is IRS Direct Pay on IRS.gov. It pulls straight from your bank account, costs nothing, and gives you a confirmation number. Save that number. For business taxes and larger operations, the Electronic Federal Tax Payment System (EFTPS) is the standard, though it takes about a week to enroll the first time, so do not wait until a deadline. You can also pay by card for a processing fee, or mail a check with a Form 1040-ES voucher. Whatever you choose, keep a record of each payment so you can report the total correctly at filing.
Do not forget your state. Most states with an income tax run their own estimated payment system, with its own deadlines and vouchers. The federal payment does not cover it. Set aside for both.
A few habits that make this painless
Three habits keep estimated taxes from becoming a crisis. First, sweep your set-aside percentage into a separate account every time you get paid, not at quarter-end. Second, use the prior-year safe harbor so you always know your target number. Third, do a quick mid-year check with your CPA, especially if your income jumped, so the back half of the year does not surprise you. Estimated taxes are not hard once the system is in place. They are just easy to forget, and the penalty is the price of forgetting.
Disclaimer: This essay is for educational purposes only and is not tax advice for your specific situation. Federal and state tax laws change, and your facts matter. Please consult a licensed CPA or tax attorney before acting on anything you read here.
Shang (Shawn) Zhou, CPA
- Some entity choices change this. Electing S-corp status, for instance, can keep profit above a reasonable salary out of self-employment tax, and income such as rental real estate is generally exempt under IRC §1402. Those exceptions are a topic for another discussion. ↩︎