Understanding Estimated Tax Payments: What Small Business Owners and Freelancers Need to Know

March 16th, 2025

Tax season is an annual ritual for most Americans. Your W-2 arrives in the mail sometime in January, then sometime during the next few months, you fill out forms, submit your return and (in many cases) eagerly await a refund from the IRS.

But other Americans have a different experience — one that’s not nearly as easy, and one that involves a little more interaction with the IRS throughout the year.

Millions of small business owners, freelancers, independent contractors and even some investors must make estimated tax payments throughout the year. And failing to understand how they work can lead to penalties, cash flow issues and unexpected tax bills.

If you’re a small business owner or self-employed professional, it’s essential to know the ins and outs of estimated tax payments … and how to avoid common mistakes that could cost you.

What Are Estimated Tax Payments?

When you work as a W-2 employee, your employer automatically withholds taxes from your paycheck for income tax, Social Security and Medicare. That’s why when tax season rolls around, most employees don’t owe much (or anything at all) beyond what’s already been withheld, and why some people even get refunds.

However, if you work for yourself — whether you’re a sole proprietor, an independent contractor, or a small business owner — you don’t have the luxury of automatic withholdings. But that doesn’t mean you’re off the hook. The IRS still wants its cut, and they expect you to pay estimated taxes four times a year.

Who Needs to Make Estimated Tax Payments?

The IRS states that you are required to make estimated tax payments if you are …

• An individual (including sole proprietors, partners, and S corporation shareholders) that expects to owe at least $1,000 in taxes when your return is filed.
• A corporation that expects to owe at least $500 in taxes when your return is filed.

This applies not only to business income but also to other sources of untaxed income, such as:

• Self-employment income
• Rental income
• Capital gains
• Interest and dividends
• Alimony

But perhaps the easiest way to think about it is this: If you expect to owe a significant tax bill and no one else is withholding those taxes for you, you’re probably required to make estimated tax payments throughout the year.

2025 Estimated Tax Payment Deadlines

Estimated tax payments are due four times a year, broken down into pseudo-quarterly periods. Here are the due dates for the 2025 tax year:

Note: If you file your 2025 tax return and pay any remaining balance in full by Feb. 2, 2026, you can skip the fourth estimated tax payment.

How to Calculate Estimated Tax Payments

Estimated taxes are based on your expected income for the year, including any deductions and credits.

The IRS provides two primary forms to help you calculate your estimated payments:

• Form 1040-ES: For individuals, including sole proprietors and independent contractors
  • Note: Nonresident aliens should use Form 1040-ES(NR).
• Form 1120-W: For corporations

In general, it’s recommended to make equal estimated tax payments throughout the year.

What Happens If You Don’t Pay (or Underpay)?

Estimated tax payments are not optional. If you underpay (or don’t pay) your estimated taxes, you might have to pay a tax penalty. However, you’ll avoid this penalty if …

• You owe less than $1,000 in tax after subtracting their withholding and refundable credits, or
• You paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

There are instances in which you might have a penalty waived — for instance, if you didn’t make a required payment because of a disaster, or if you became disabled during the tax year (and the underpayment was due to reasonable cause and not willful neglect).

Take the Guesswork Out of Estimated Tax Payments

Figuring out how much to pay in estimated taxes can be tricky, especially if your income varies from quarter to quarter. Missteps can lead to penalties or cash flow issues, which is why many small business owners and freelancers turn to professional tax services.

At McManamon & Co., we specialize in helping small and midsize businesses with their tax planning and payment strategies. Our experts can:

• Help you accurately calculate estimated taxes based on your income and deductions
• Set up a payment plan to avoid cash flow issues
• Adjust your estimated tax payments throughout the year to reflect changes in your business
• Ensure you meet all filing deadlines and avoid penalties

Call us today at 440.892.8900 or contact us online to schedule a consultation.

Tags:  estimated tax payments, McManamon, small business, small business taxes, taxes | Posted in McManamon & Co., small business taxes, taxes