How to Calculate Your Quarterly Taxes
Nothing ruins a good quarter like a surprise tax bill.
The U.S. tax system runs on a "pay-as-you-go" model. While W-2 employees have taxes withheld automatically from each paycheck, business owners have to manage this themselves through quarterly payments.
Miss a payment or underpay, and the IRS hits you with penalties—even if you're owed a refund later. They don't wait for tax season to collect.
And don't forget: Most states require quarterly payments too. Texas businesses are lucky—no state income tax!
The Quarterly Tax Calendar
- Q1 (Jan-Mar): April 15, 2025
- Q2 (Apr-Jun): June 16, 2025
- Q3 (Jul-Sep): September 15, 2025
- Q4 (Oct-Dec): January 15, 2026
Miss these dates, and you're essentially giving the IRS an interest-free loan on your money plus penalties.
3 Ways to Calculate What You Owe
1. The Safe Harbor Method (Easiest)
Pay the IRS either 100% of last year's taxes (110% if your AGI was over $150,000), or 90% of this year's estimated taxes.
Pros:
- Simple calculation based on last year's return
- Guaranteed to avoid penalties
- No need to predict your income precisely
- Works well for stable businesses with predictable year-over-year growth
Cons:
- May overpay if your business is having a down year
- Doesn't account for significant changes in your business
- Could tie up cash that could be used elsewhere in your business
Pro tip: Most business owners go with last year's numbers. If you paid $20,000 in taxes last year, paying $5,000 per quarter keeps you safe.
2. The Estimated Current Year Method
If your income fluctuates or you're having a much better (or worse) year, estimating your taxes might be smarter.
Pros:
- More accurate when your income has changed significantly
- Helps conserve cash flow in down years
- Better reflects your current business reality
Cons:
- Requires more calculation and forecasting
- Risk of penalties if you underestimate
- Needs ongoing monitoring and potential adjustments
To use this method, you must calculate your expected tax liability for the year based on projected income, deductions, and credits. Just be careful; underestimating can lead to penalties.
3. The Annualized Income Method (Most Complex)
If your income is seasonal or irregular, you can pay based on your actual earnings each quarter.
Pros:
- Most precise method for seasonal businesses
- Aligns payments with actual cash flow
- Prevents overpayment during slow periods
- Can reduce or eliminate penalties when income is uneven
Cons:
- Requires detailed record-keeping
- Most time-consuming calculation
- Needs Form 2210 with your annual return
- May require professional assistance
This is the method we apply to all of our clients at Better Bookkeeping. It takes more time but helps avoid overpaying during slow periods and gives you the most accurate sense of your actual tax liability.
How to Actually Pay the IRS
You can pay your quarterly taxes easily through the IRS Electronic Federal Tax Payment System, IRS Direct Pay, or by mailing a check with Form 1040-ES payment voucher to the IRS. EFTPS allows scheduling payments up to a year in advance, while Direct Pay offers quick payment without registration.
Avoiding the Penalty Trap
The IRS penalty for underpayment is calculated based on how much you underpaid and for how long. The current rate is 8%.
But here's the good news: you can avoid penalties entirely if you owe less than $1,000 in tax after subtracting withholdings/credits or make accurate quarterly tax estimates on time.
Strategies for Quarterly Tax Management
- Set up a separate tax savings account. Automatically transfer a percentage of each payment you receive into this account. I recommend 25-30% for most service businesses.
- Pay more in high-income quarters. If your business is seasonal, adjust your payments accordingly.
- Consider tax planning mid-year. Don't wait until December to look for deductions or tax-saving opportunities. A mid-year check-in with your CPA can save thousands.
- Use tools to tracks tax obligations. This is why we built Better Bookkeeping. Clean books makes quarterly tax calculations infinitely easier.
- When in doubt, overpay slightly. It's better to get a small refund than pay penalties. Think of it as forced savings with peace of mind.