The federal income tax is pay-as-you-go. Employees pay through withholding and never think about it. Business owners, landlords and anyone with significant income outside a paycheck are expected to send the tax in themselves, four times a year. Get it roughly right and nothing happens. Fall short and the IRS charges an underpayment penalty that works like interest, even if you pay everything you owe by April.
Who has to pay
You generally need to make estimated payments if you expect to owe at least $1,000 for the year after subtracting withholding and credits. That covers most owners of sole proprietorships, partnerships and S corporations, because the business income passes through to their personal returns with no tax withheld. Corporations that expect to owe $500 or more pay their own estimates. Arizona sets its own test: individuals must make Arizona estimated payments when their Arizona gross income was more than $75,000 ($150,000 for married couples filing jointly) in both the prior year and the current year. Owners below those thresholds can still pay Arizona estimates voluntarily to avoid a large balance in April.
The four due dates
| Income earned | Payment due |
|---|---|
| January 1 to March 31 | April 15 |
| April 1 to May 31 | June 15 |
| June 1 to August 31 | September 15 |
| September 1 to December 31 | January 15 of the next year |
When a date falls on a weekend or holiday, the deadline moves to the next business day. Notice that the "quarters" are not equal: the second covers two months and the fourth covers four. The January payment is the one most often missed, because it arrives after the year feels finished.
How much to pay: the safe harbors
You avoid the underpayment penalty if your payments and withholding during the year add up to at least one of these, paid in roughly equal installments:
- 90% of the tax you will actually owe this year, or
- 100% of the tax shown on last year's return, which rises to 110% if last year's adjusted gross income was more than $150,000 ($75,000 if married filing separately).
The prior-year safe harbor is the simplest. It needs no forecasting: divide last year's total tax by four and pay it on schedule, and you are protected even if this year's income doubles. The cost is cash flow. If income dropped, you pay more than necessary during the year and wait for a refund. If income jumped, the safe harbor protects you from the penalty but leaves a large balance due in April, so plan for it.
When income is uneven
Businesses with seasonal or lumpy income can use the annualized income installment method, calculated on Schedule AI of Form 2210. It lets you pay less in the quarters when you earned less, as long as each payment matches the income earned so far. It takes bookkeeping that is current enough to know your year-to-date profit at each deadline, which is one practical argument for a monthly close.
The S corporation owner's advantage
Tax withheld from wages is treated as if it were paid evenly through the year, no matter when it was actually withheld. An S corporation owner on payroll can therefore cover the whole year's liability through withholding on their salary, and can even increase withholding on the last paychecks of the year to cure a shortfall from earlier quarters. Partners and sole proprietors do not have this option because they have no wages to withhold from.
How to pay
Pay federal estimates through IRS Direct Pay or your IRS online account, or through EFTPS for businesses. The IRS is phasing EFTPS out for individual taxpayers, so if you pay personal estimates through EFTPS today, move them to Direct Pay or your online account. Choose the correct tax year and the correct payment type ("estimated tax") when you pay; the most common posting error we see is a January payment applied to the wrong year. Keep the confirmation numbers. Arizona estimated payments can be made through AZTaxes.gov by choosing "140ES: Estimate Payments"; when you pay online, you do not mail Form 140ES.
The mistakes that cost money
- Paying last year's amount after a year in which income rose sharply, then facing a large April balance plus interest from the date the money should have been paid.
- Skipping the January 15 payment.
- Assuming a filing extension extends the time to pay. It does not; the tax was still due April 15.
- Forgetting the state. Arizona's penalty is separate.
- Treating estimates as optional in the first year of a business. The requirement starts the moment the income does.
What we do
Clients get a quarterly projection before each due date, built from current books rather than last year's return, with the federal and Arizona amounts and the payment instructions. When a client is an S corporation owner, we usually set the withholding on their salary to carry the liability so there is nothing to remember each quarter. When income changes mid-year, the projection changes with it.
Book a Discovery Call if you are guessing at your quarterly payments or have been surprised by a penalty.
This guide is general information for small business owners, not advice for your specific situation. Tax law changes and the details matter, so talk with a professional before acting.
Sources: IRS, Estimated taxes · IRS, About Form 1040-ES · IRS, About Form 2210 · Arizona Department of Revenue, Individual estimated tax payments