Estimated Taxes: What You Need to Know for Individuals and Businesses

Estimated taxes are advance payments made to the IRS throughout the year on income that is not subject to withholding.

Instead of paying all taxes at once when you file your return, estimated taxes spread payments across the year.

They typically cover:

🔹 Federal income tax

🔹 Self-employment tax (Social Security and Medicare)

🔹 Certain other taxes, depending on situation

🟢 WHO NEEDS TO PAY ESTIMATED TAXES

Estimated taxes commonly apply to:

🔹 Self-employed individuals and freelancers

🔹 Business owners (LLCs, S-Corps, partnerships)

🔹 Independent contractors receiving 1099 income

🔹 People with rental income

🔹 Investors with dividends, interest, or capital gains

🔹 Anyone whose withholding is not sufficient

If no taxes are being withheld, estimated payments are often required.

🟢 HOW THE IRS DECIDES IF ESTIMATED TAXES ARE REQUIRED

You generally need to pay estimated taxes if both of the following apply:

🔹 You expect to owe tax when you file your return

🔹 Your withholding and credits will not cover that tax

A common guideline:

🔹 If you expect to owe $1,000 or more when filing, estimated taxes usually apply

🟢 ESTIMATED TAX PAYMENT DEADLINES

Estimated taxes are typically paid four times per year.

The usual federal due dates are:

🔹 First payment: spring

🔹 Second payment: early summer

🔹 Third payment: early fall

🔹 Fourth payment: early winter

These deadlines do not line up evenly with calendar quarters, which often causes confusion.

🟢 HOW MUCH SHOULD YOU PAY?

There are two common approaches for calculating estimated tax payments.

🔹 SAFE HARBOR METHOD

The safe harbor method is designed to help taxpayers avoid underpayment penalties, even if their income increases during the year.

Under this method, you generally avoid penalties if you pay:

🔹 100% of last year’s total tax, or

🔹 110% of last year’s total tax if your income was above certain IRS thresholds

These payments are made evenly throughout the year, regardless of what your actual income ends up being.

Key points about the safe harbor method:

🔹 It is based on last year’s tax, not this year’s income

🔹 It provides certainty and simplicity

🔹 You may still owe tax when you file, but penalties are usually avoided

This approach is often preferred when income is unpredictable.

🔹 CURRENT-YEAR ESTIMATE METHOD

With this method, you estimate how much tax you expect to owe for the current year and make payments based on that estimate.

This approach:

🔹 Can reduce overpayments

🔹 Requires monitoring income throughout the year

🔹 May require adjusting payments if income changes

It works best when income is stable and predictable.

🟢 CHOOSING THE RIGHT METHOD

🔹 Variable or growing income → safe harbor method often makes sense

🔹 Stable income → current-year estimate may be more accurate

🔹 Unsure → safe harbor offers protection against penalties

Selecting the right method depends on income stability, cash flow, and planning preferences.

🟢 ESTIMATED TAXES FOR BUSINESS OWNERS

Business owners often deal with estimated taxes in multiple ways:

🔹 Sole proprietors and single-member LLCs pay estimates personally

🔹 Partners pay estimates based on K-1 income

🔹 S-Corp owners may use a mix of payroll withholding and estimates

Using payroll withholding strategically can sometimes reduce the need for separate estimated payments.

🟢 WHAT HAPPENS IF YOU DON’T PAY ESTIMATED TAXES?

Missing or underpaying estimated taxes can result in:

🔹 Underpayment penalties

🔹 Interest on unpaid amounts

🔹 Unexpected balances due at filing

Even if you pay everything when you file, penalties may still apply if estimates were required.

🟢 COMMON MISUNDERSTANDINGS

🔹 “I’ll just pay when I file”→ Penalties can still apply.

🔹 “Estimated taxes are optional”→ They are required in many situations.

🔹 “I only need to worry if income is high”→ Even modest income can trigger estimates if nothing is withheld.

🟢 A PRACTICAL RULE OF THUMB

🔹 No withholding → estimated taxes likely required

🔹 Self-employed or business income → review quarterly

🔹 Income changes during the year → adjust payments

🔹 Unsure → review before penalties apply

Regular review is easier than correcting issues later.

🟢 NEED HELP WITH ESTIMATED TAXES?

Estimated taxes don’t need to be complicated, but they do need to be handled correctly.

At Pacific Change, we help clients:

🔹 Determine whether estimated taxes are required

🔹 Calculate appropriate quarterly payments

🔹 Adjust estimates as income changes

🔹 Coordinate business and personal tax planning

If you’re unsure whether you need to pay estimated taxes or how much - we’re happy to help.