April 15th is the due date for the 2025 federal income tax return for individuals (and calendar-year C corporations). But it’s also the date for paying the first installment of estimated taxes for 2026. You have to partially pay now on income that’s going to be earned later in the year. There’s confusion about who has to pay estimated taxes and how to figure quarterly installments.
Overview of estimated taxes
Estimated taxes are not separate tax obligations; they are a method of paying throughout the year what you expect to owe when you ultimately file your return. If you do not pay enough estimated taxes (plus withholding taxes on wages and certain other payments), you may be subject to penalties.
You must pay estimated taxes if you expect tax liability for the year to be at least $1,000 and you do not meet a safe harbor test explained later or file your return and pay the tax in full by January 31 (February 28 for farmers and commercial fishermen). (For 2025 returns, there’s special relief for farmers and fishermen due to problems with tax forms, so that there won’t be any penalty if they file their 2025 returns and pay all taxes due by April 15, 2026.)
Estimated taxes cover:
- Regular income tax (including income taxes on your share of business income)
- Alternative minimum tax for high-income taxpayers
- Self-employment tax
- Additional Medicare taxes on earned income and net investment income
- Employment taxes on a household employee
- Additional tax—essentially penalties—on IRAs, qualified retirement plans, and other tax-favored accounts
Estimated taxes are due on April 15, June 15, September 15, and January 15 of the following year. The due date is extended to the next business day if any payment date falls on a Saturday, Sunday, or legal holiday. And there may be automatic extensions for victims of federal or state disasters. But you cannot request an extension of time to pay estimated taxes; the deadlines are set in stone.
General information about estimated taxes, including how to make payments, is in IRS Publication 505 and Form 1040-ES.
Strategies for figuring estimated taxes
How do you know what to pay on April 16, 2026, for one-fourth of estimated taxes covering all of 2026? There’s no crystal ball for this, but there are various ways to avoid the need to pay any estimated taxes or at least minimize or avoid any estimated tax penalties for paying too little.
Safe harbor test
You won’t be penalized if your estimated taxes fall short as long as you rely on a safe harbor test in the law. The safe harbor test means that your withholdings and tax credits (e.g., applying an excess payment from last year toward this year’s taxes) are less than the smaller of:
- 90% of the tax shown to be on this year’s return (66% for farmers and commercial fishermen), or
- 100% of the tax shown on last year’s return (110% if your adjusted gross income last year is more than $150,000, or $75,000 if married filing separately).
Use withholding
If you have enough taxes withheld from wages and certain other payments (e.g., pensions, annuities, Social Security benefits, unemployment benefits), you won’t need to pay estimated taxes. For example, if you are an S corporation owner-employee, have sufficient withholding from wages to coverage taxes on your share of business income.
- If you are a limited liability company, elect to be treated as an S corporation so you have wages from which withholding can be taken. This may avoid the need to pay any estimated taxes.
- If you are self-employed and have a spouse who is an employee, the spouse can increase his/her estimated taxes to cover your liability on your share of business income. Again, this may avoid the need to pay any estimated taxes.
- Increase withholding near year-end when your business and investment income for the year comes into greater focus. Depending on the facts, this may not avoid underpayments penalties, but will surely reduce them. Using the annualized method for estimated taxes, there are no penalties if you can match income with estimated tax payments.
- Use voluntary withholding on certain payments.
Final thought
Perhaps the biggest challenge for paying estimated taxes is not figuring what’s owed but rather having the funds on hand to make timely payments. It’s highly advisable for small business owners who owe estimated taxes to set aside funds on a regular basis to cover this obligation. Some owners I know have a separate bank account for this purpose. Put a percentage of fees, gross receipts, or other revenue (e.g., 20%, 25%, 30%) aside for estimated tax purposes. Sure, business income on the return is reduced by deductions, but this is a rule of thumb for money management purposes.
For more constructive information about estimated taxes, see this list of blogs.
