Understanding quarterly taxes: A complete guide for business owners

Self-employed individuals and small business owners face a unique tax landscape. Quarterly tax payments are an integral part of managing your finances since they could help you avoid a huge tax payment at the end of the year.

Understanding this system helps you budget more effectively and avoid potential penalties from the IRS.

What are quarterly taxes?

Quarterly taxes are estimated tax payments that self-employed individuals and small business owners make four times per year. Unlike employees who have taxes automatically withheld from each paycheck, when you're self-employed, you calculate and pay your own taxes throughout the year.

These payments represent your best estimate of the tax liability you'll face based on your earnings throughout the year. The IRS operates on a "pay-as-you-go" system, meaning taxes should be paid as you earn income during the year.

You need to make quarterly tax payments if you expect to owe $1,000 or more in taxes when filing your annual return. Payments typically come due on April 15, June 15, September 15, and January 15 of the following year.

The two categories of quarterly taxes

When making quarterly tax payments, you're covering two primary categories:

• Self-Employment Tax
  • Covers Social Security and Medicare taxes
  • Rate is 15.3% of net earnings (12.4% for Social Security, 2.9% for Medicare)
  • Applies to net income over $400
  • Additional 0.9% Medicare tax on income over $200,000 ($250,000 for married filing jointly)
  • Self-employed individuals can deduct one-half of the tax as a business expense.
• Income Tax
  • Based on your tax bracket and estimated annual income
  • Covers federal, state, and local income taxes as applicable
  • Calculated after accounting for deductions and credits

Consequences of not paying quarterly taxes

Missing your quarterly tax payments creates real problems.

The IRS hits you with an underpayment penalty of 0.5% of unpaid taxes per month, up to 25% of the total taxes owed, plus interest. Here's something many people miss: these penalties can apply even if you're due a refund when filing your annual return.

Beyond penalties, you'll face a large tax bill at filing time, potentially throwing your finances into chaos.

The IRS calculates penalties separately for each quarterly due date, with higher penalties for higher-income taxpayers. Miss multiple quarters and your problems compound, becoming increasingly expensive over time.

2025 and 2026 quarterly tax payment timelines

Here are the payment schedules for 2025 and 2026:

2025 quarterly tax payment schedule

2026 quarterly tax payment schedule

How to pay quarterly taxes

You have several options for submitting your quarterly tax payments, utilizing various electronic payment methods or traditional means:

• Electronic Federal Tax Payment System (EFTPS): A free service from the U.S. Department of Treasury that allows you to schedule payments up to 365 days ahead.
• IRS Direct Pay: This free online service lets you pay directly from a checking or savings account without pre-registration, often similar to using eChecks for payments.
• Credit or Debit Card: Make payments online, by phone, or via mobile device, but be aware this method involves processing fees.
• Check or Money Order: Mail with Form 1040-ES payment voucher, made payable to "United States Treasury."
• Cash: Available at select IRS Taxpayer Assistance Centers, but requires an appointment.
• IRS2Go Mobile App: The official IRS mobile app that facilitates payments through Direct Pay or card payments.

If you’ve paid too much, you can apply overpayments to future estimated tax payments, reducing or eliminating your next required quarterly payment. You can designate on your tax return to apply overpayments to next year's estimated taxes.

If your income changes significantly mid-year, you can recalculate your estimated taxes using the Form 1040-ES worksheet and adjust your remaining payments.

Who needs to pay quarterly taxes?

The U.S. tax system works on a "pay-as-you-go" basis. For self-employed individuals and business owners, this means making quarterly estimated tax payments throughout the year.

Self-employed individuals

Self-employed individuals must make quarterly estimated tax payments if their net earnings from self-employment are $400 or more, according to the IRS. Understanding how to file taxes for small businesses is essential to comply with these requirements. This requirement applies to:

• Sole proprietors
• Independent contractors
• Freelancers
• Gig economy workers
• Partners in partnerships

Self-employed individuals must pay both income tax and self-employment tax through these quarterly payments, although employing tax optimization strategies can help manage these obligations. The self-employment tax covers Social Security and Medicare contributions that would otherwise be partially covered by an employer.

Business owners and corporations

Small business owners need to make quarterly payments if they expect to owe $500 or more in taxes, according to the IRS. This requirement applies to corporations as well as individuals.

For business owners, including those operating as LLCs, estimated tax payments should account for both the business's expected profitability and any salary or distributions the owner plans to take.

Understanding LLC tax rates can help in accurately calculating these payments. S-corporation owners may need to make quarterly payments on their share of business profits, even if they take a regular salary with withholdings.

Special rules and exceptions

Farmers and fishermen follow different rules, with just one estimated tax payment due January 15, based on 66 2/3% of current year tax or 100% of prior year tax, according to the IRS.

The quarterly tax payment system provides steady cash flow to the government while preventing taxpayers from facing large, potentially overwhelming tax bills at year-end.

How to calculate quarterly tax payments

You can determine your quarterly tax payments by projecting your yearly earnings, calculating your tax obligation based on current rates, then splitting this amount into four installments.

Start with last year's tax return

Your previous tax return provides invaluable insights for planning. Review your recent Form 1040 and note your total tax liability, adjusted gross income, and tax credits. This data creates a solid foundation, especially if your income remains relatively consistent. If you anticipate similar earnings this year, your previous tax liability serves as an excellent benchmark.

Estimate your current taxable income

Next, project your taxable income for this year. For irregular income, consider breaking down your projection by quarter to account for seasonal changes.

Calculate your deductions and credits

After estimating income, determine which deductions and credits you qualify for. Common deductions include the standard deduction or itemized deductions, business tax deductions, retirement contributions, and student loan interest. Self-employed taxpayers can also deduct health insurance premiums and part of the self-employment tax.

Exploring tax deductions for sole proprietors can maximize your eligible deductions. Be aware of non-deductible business expenses that cannot be written off, to avoid miscalculations in your deductions.

Use the Form 1040-ES worksheet

The IRS provides Form 1040-ES specifically for calculating estimated tax payments. The included worksheet guides you through the entire process—estimating adjusted gross income, subtracting deductions to find taxable income, calculating expected tax (including self-employment tax if applicable), and subtracting withholdings or credits.

After completing it, you'll know your total estimated tax for the year and whether you need quarterly payments. The Form 1040-ES is updated annually, so use the current version.

Determine your quarterly payment amounts

Once you've calculated your total estimated tax, divide by four for equal quarterly payments. If your estimated tax is $12,000, your quarterly payments would be $3,000 each. For fluctuating income, you might need the annualized income installment method to calculate different amounts each quarter.

This method lets you pay proportionally based on when you actually earn income—perfect for seasonal businesses or irregular income streams.

Example calculation

Let's walk through a practical example for a self-employed person. Assume $80,000 in total income, with $15,000 in business expenses.

You'll also have a self-employment tax deduction of about $4,000, and you'll take the 2025 standard deduction of $15,000 (for a single filer).

Your estimated taxable income would be $48,050 ($80,000 - $15,000 - $4,000 - $15,000).

Using tax tables and calculating self-employment tax, your total estimated tax might be $12,000 for the year. Divided by four, your quarterly estimated tax payments would be $3,000 each.

Remember to recalculate if your income or deductions change significantly during the year.

Tips for effectively managing cash flow for quarterly tax payments

Tracking your tax payments while managing the ins and outs of your business can get complicated in a hurry. Small businesses can effectively manage cash flow for quarterly tax payments by creating a dedicated tax account with automated transfers of income, leveraging accounting software and forecasting tools, consulting with financial professionals for strategic guidance, and maintaining 3-6 months of cash reserves while scheduling major expenses around tax deadlines.

Create a dedicated tax budget

Begin by establishing a dedicated tax budget. Financial experts recommend setting aside approximately 25-30% of your income specifically for taxes. Create a separate savings account exclusively for tax payments to prevent inadvertently using your tax funds.

Implement automation by scheduling transfers to your tax savings account whenever you receive payment. This proactive approach ensures consistent saving. Review and adjust your tax savings rate quarterly based on your actual income, as your tax liability may fluctuate throughout the year.

Leverage digital tools for tracking

Several digital solutions can streamline tax planning and cash flow management:

• Accounting software like QuickBooks or Xero tracks income and expenses while generating useful financial reports.
• Cash flow forecasting tools help you project future cash flow and spot potential shortfalls before they happen.
• Expense management platforms like Ramp simplify monitoring business expenses and identifying potential tax deductions.

Consult with financial professionals

While technology assists, professional guidance remains invaluable. Partnering with an accountant or bookkeeper helps establish proper accounting systems and ensures accurate tracking. A tax advisor can provide tailored guidance, including tax strategies for small businesses to potentially reduce your tax obligations and avoid underpayment penalties.

For businesses with complex financial requirements, consider engaging a fractional CFO who delivers high-level financial oversight without the expense of a full-time executive.

Monitor your cash flow weekly to identify potential issues early. Aim to maintain cash reserves of 3-6 months of expenses as a financial safety net. When feasible, schedule major expenses and investments around your quarterly tax payment deadlines to avoid cash shortages when taxes come due.

Simplify your quarterly tax management with Ramp

Managing quarterly tax payments can be complex and time-consuming, but it doesn't have to be. At Ramp, we understand the challenges small businesses face and offer solutions to streamline your financial operations.

Don't let quarterly tax payments overwhelm you. Leverage Ramp’s accounting automation features to speed up your monthly close and quickly review how much you owe each quarter in taxes.

The information provided in this article does not constitute accounting, legal, or financial advice and is for general informational purposes only. Please contact an accountant, attorney, or financial advisor to obtain advice with respect to your business.