The Ultimate Guide to Quarterly Estimated Taxes for LLCs: A Simple System for a Complicated Tax
For most new business owners, the first time they hear the words “quarterly estimated taxes,” it’s a moment of pure panic. It sounds complicated, stressful, and like another thing to worry about. The good news is, it doesn’t have to be. The fear around estimated taxes is a fear of the unknown. This guide will eliminate that fear by giving you a simple, repeatable system for calculating and paying your estimated taxes on time, every time. This is not a guide for tax experts; this is a guide for business owners who want to be confident and in control.
What Are Estimated Taxes and Why Do I Have to Pay Them?
The U.S. tax system is a “pay-as-you-go” system. When you were an employee, your employer handled this for you. They withheld a portion of your paycheck for federal and state taxes and sent it to the government on your behalf. Now that you are a business owner, you are your own employer. You are responsible for sending in your taxes throughout the year.
That’s all estimated taxes are: you paying your taxes as you go.
Who Needs to Pay?
The rule is simple: if you expect to owe more than $1,000 in tax for the year when you file your return, you need to pay estimated taxes. For most successful LLC owners, this is a given.
A Masterclass on the Estimated Tax Worksheet (Form 1040-ES)
This is where the rubber meets the road. The worksheet can look intimidating, but it’s just a series of steps to estimate your tax liability for the year. Let’s walk through it.
- Adjusted Gross Income (AGI): This is your total income minus certain “above-the-line” deductions. You will need to project your business profit for the year, as well as any other income you have (W-2, investments, etc.).
- Deductions: You will either take the standard deduction or itemize your deductions. You will need to project which one will be higher for you.
- Taxable Income: Line 1 minus Line 2.
- Tax: You will use the tax brackets for your filing status to calculate the tax on your taxable income.
- Alternative Minimum Tax (AMT): For most small business owners, this will be zero.
- Credits: You will subtract any tax credits you expect to receive.
- Self-Employment Tax: This is a big one. You will need to calculate your self-employment tax (15.3% on the first $168,600 of profit in 2024).
- Other Taxes: This could include things like the net investment income tax.
- Total Tax: This is your total estimated tax for the year.
- The Safe Harbor Calculation: This is where you multiply your total tax by 90% (or 100% of your prior year tax, if that is smaller).
- Withholding: You will subtract any taxes you expect to have withheld from a W-2 job.
- The Bottom Line: This is the total amount of estimated tax you need to pay for the year.
- Your Quarterly Payment: Divide Line 12 by four.
This process forces you to create a mini-tax return for yourself each quarter. It is the most accurate way to determine your estimated tax payments.
The Quarterly Estimated Tax Calculator
This calculator will help you estimate your quarterly payments using the Annualized Income method.
How to Pay Your Estimated Taxes: A Step-by-Step Guide
Once you know how much you need to pay, the process of actually paying is simple.
Step 1: The Deadlines:
This is the most important part. Mark these dates on your calendar:
- April 15
- June 15
- September 15
- January 15 of the following year
Step 2: How to Pay:
You have several options for paying your federal estimated taxes:
- IRS Direct Pay: This is the easiest method. You can pay directly from your bank account for free on the IRS website.
- EFTPS (Electronic Federal Tax Payment System): This is a more robust system that is good for businesses that make frequent tax payments. You have to enroll in the system, but it gives you more flexibility.
- Mail a Check: You can still print out a Form 1040-ES payment voucher and mail a check to the IRS.
Step 3: Don’t Forget Your State!
If you live in a state with an income tax, you will also need to make estimated tax payments to your state. The process is similar, and you can usually pay online through your state’s department of revenue website.
A Deep Dive on the Underpayment Penalty (Form 2210)
The underpayment penalty is not a monster under the bed. It is simply an interest charge. The IRS charges you interest on the amount you underpaid for the number of days you were late. The interest rate is the federal short-term rate plus 3%, and it is calculated quarterly.
How the IRS Calculates the Penalty:
Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” is the form the IRS uses to calculate the penalty. It is a complex form, but the concept is simple. It compares the amount you should have paid each quarter to the amount you actually paid. If there is a shortfall, it calculates the interest on that shortfall from the due date of the payment to the date you paid it.
Penalty Waiver Provisions:
There are a few situations where the IRS will waive the underpayment penalty. These are rare, but it is important to know them.
- Casualty or Disaster: If you were unable to pay due to a casualty, disaster, or other unusual circumstance, the IRS may waive the penalty.
- Retirement or Disability: If you retired (after reaching age 62) or became disabled during the tax year, and your underpayment was due to reasonable cause and not willful neglect, the IRS may waive the penalty.
An Expanded Guide for First-Year Businesses
Your first year in business is the hardest when it comes to estimated taxes because you have no prior year tax liability to use as a safe harbor. You are flying blind. Here is a simple framework to get you through it.
- Be Conservative: It is always better to overpay than to underpay in your first year. You will get the money back as a refund.
- Project High: When you are projecting your income for the year, err on the side of being optimistic. This will help you avoid an underpayment penalty.
- The “25% of Profit” Rule of Thumb: A good, conservative rule of thumb for your first year is to set aside 25-30% of your net profit for taxes. This will generally be enough to cover your federal and state obligations.
- Create Your Safe Harbor: The goal in your first year is to create a tax liability that you can use as your safe harbor for year two. Even if you have to overpay a bit to do it, it will make your life so much simpler in your second year.
The Ultimate 50-State Guide to Estimated Tax Payments
Once you know how much you need to pay, the process of actually paying is simple.
| State | Income Tax? | Payment Portal |
|---|---|---|
| Alabama | Yes | AL DOR |
| Alaska | No | N/A |
| Arizona | Yes | AZ DOR |
| Arkansas | Yes | AR DFA |
| California | Yes | CA FTB |
| Colorado | Yes | CO DOR |
| Connecticut | Yes | CT DRS |
| Delaware | Yes | DE DOR |
| Florida | No | N/A |
| Georgia | Yes | GA DOR |
| Hawaii | Yes | HI DOT |
| Idaho | Yes | ID STC |
| Illinois | Yes | IL DOR |
| Indiana | Yes | IN DOR |
| Iowa | Yes | IA DOR |
| Kansas | Yes | KS DOR |
| Kentucky | Yes | KY DOR |
| Louisiana | Yes | LA DOR |
| Maine | Yes | ME MRS |
| Maryland | Yes | MD Comptroller |
| Massachusetts | Yes | MA DOR |
| Michigan | Yes | MI Treasury |
| Minnesota | Yes | MN DOR |
| Mississippi | Yes | MS DOR |
| Missouri | Yes | MO DOR |
| Montana | Yes | MT DOR |
| Nebraska | Yes | NE DOR |
| Nevada | No | N/A |
| New Hampshire | No (earned income) | N/A |
| New Jersey | Yes | NJ Treasury |
| New Mexico | Yes | NM TRD |
| New York | Yes | NY DTF |
| North Carolina | Yes | NC DOR |
| North Dakota | Yes | ND OTR |
| Ohio | Yes | OH DT |
| Oklahoma | Yes | OK TC |
| Oregon | Yes | OR DOR |
| Pennsylvania | Yes | PA DOR |
| Rhode Island | Yes | RI DOT |
| South Carolina | Yes | SC DOR |
| South Dakota | No | N/A |
| Tennessee | No (earned income) | N/A |
| Texas | No | N/A |
| Utah | Yes | UT STC |
| Vermont | Yes | VT DOT |
| Virginia | Yes | VA TAX |
| Washington | No | N/A |
| West Virginia | Yes | WV STD |
| Wisconsin | Yes | WI DOR |
| Wyoming | No | N/A |
The Final Word: A System for Peace of Mind
Quarterly estimated taxes are a sign of success. They mean you are a profitable business owner who is in control of your financial destiny. The key is to build a simple, repeatable system for calculating and paying them. Choose your method, mark the deadlines on your calendar, and make your payments on time. By doing so, you will eliminate the anxiety and be free to focus on what you do best: building your business.