What are quarterly estimated taxes, and do I actually have to pay them?

When you had a regular job, taxes came out of every paycheck before you saw the money. You never had to think about it. When you work for yourself, nobody's doing that withholding, so the IRS asks you to do it yourself, four times a year. Those are estimated taxes.

Whether you have to pay them comes down to a rule of thumb: if you expect to owe about $1,000 or more in tax for the year after any withholding, the IRS wants estimated payments. For most self-employed people making real money, that's a yes.

Here's why they exist, and why skipping them costs you. The tax system is pay-as-you-go. The government doesn't want to wait until April for a year's worth of tax, so if you underpay along the way, they charge an underpayment penalty, essentially interest on the money you should have sent earlier. You can pay your whole bill in April and still owe that penalty. It's small, but it's pure waste, a fee for timing.

How to figure your number: estimated taxes cover both income tax and self-employment tax (the 15.3 percent for Social Security and Medicare). A workable starting method is to take your expected profit, set aside 25 to 30 percent of it, and split that across the four payments. If your income is steady, that's close. If it swings, you recalculate each quarter based on what you actually earned. There's also a shortcut called safe harbor: if you pay in at least 100 percent of last year's total tax (110 percent if you're a higher earner), you generally avoid the penalty no matter what this year turns out to be.

When they're due: the deadlines fall roughly on April 15, June 15, September 15, and January 15 of the following year. They're not evenly spaced, which trips people up, so put them on a calendar now.

The honest part: your exact number depends on your full picture, and a CPA can pin it down. But you don't need perfect to avoid the penalty. You need close, and paid on time. We help clients keep books current enough that "what do I owe this quarter" takes a few minutes instead of a small panic.

Related reading: Why photographing your receipts matters more than you think · Do I need a separate bank account for my business?

True North Co · Bookkeeping for small businesses · Hugo, MN

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