Estimated quarterly tax payments are how business owners and self-employed individuals pay income tax throughout the year. W-2 employees have taxes withheld from every paycheck automatically. When you run a business, nobody is withholding for you, so the IRS expects you to send payments four times a year as you earn income.

The due dates are April 15, June 15, September 15, and January 15 of the following year. These aren’t evenly spaced, and they don’t line up perfectly with calendar quarters. The first period covers January through March, the second covers April and May, the third covers June through August, and the fourth covers September through December. Tennessee doesn’t have a state income tax on earned income, so if your business operates here in the Nashville area, you’re only dealing with federal estimated payments. If you earn income in other states, you may owe estimated payments there too.

You’re generally required to make estimated payments if you expect to owe $1,000 or more in federal tax for the year after subtracting withholding and credits. The IRS gives you two safe approaches to avoid underpayment penalties. The first is paying at least 100% of your prior year’s total tax liability spread across four equal payments (110% if your adjusted gross income exceeded $150,000). The second is paying at least 90% of your current year’s actual tax liability. Most business owners go with the prior year safe harbor because it’s simpler. You already know last year’s tax number, so dividing it by four gives you a clear target each quarter.

The current year method works better when your income is dropping significantly. Paying based on last year’s higher income when this year is slow ties up cash you might need. On the other hand, if your income is growing quickly, the prior year method might leave you with a big balance due in April. Neither approach is wrong, but the right choice depends on what’s actually happening in your business. Proactive tax advisory throughout the year helps you pick the right method and adjust as circumstances change.

To make payments, use IRS Direct Pay or EFTPS (Electronic Federal Tax Payment System). Both are free. You can also mail a check with Form 1040-ES, but electronic payments are faster and create a clear record. Make sure each payment is applied to the correct tax year and quarter so nothing gets misallocated.

What happens if you underpay? The IRS charges a penalty that works like interest on the shortfall for each quarter you were short. The penalty rate is tied to the federal short-term rate plus 3 percentage points, which has been running around 7-8% recently. It’s not devastating for one quarter, but consistently underpaying adds up. Paying late is still better than not paying at all since the penalty only applies to the period the payment was short.

Track your estimated payments in your accounting software so they don’t get lost at year end. They’re not business expenses. They reduce your personal tax liability and should be recorded as owner draws or distributions depending on your entity type. When your tax return is prepared, these payments get credited against your total tax due.

The most common mistake is not starting estimated payments when a business first becomes profitable. Many new business owners don’t realize they need to pay quarterly until they file their first return and get hit with both a large tax bill and an underpayment penalty on top of it. If your income varies a lot from quarter to quarter, you can use the annualized income installment method to base each payment on income actually earned during that period rather than assuming even distribution. This takes more calculation but prevents overpaying during slow months.

Getting estimated payments right is one piece of a bigger financial picture. Working with CFO services for small businesses means someone is watching your income trends, adjusting your quarterly targets, and making sure you’re not surprised when April rolls around.