- 1Close the books through last month. Year-to-date net income from a closed set of books, not a bank balance and not a revenue figure.
- 2Project September through December. Use your pipeline and known costs: the October hire, the contract ending in November, the committed equipment purchase.
- 3Adjust book income to taxable income. Depreciation and first-year expensing, partly deductible meals, owner health insurance, retirement contributions, any pass-through entity tax election.
- 4Apply the real rate. Federal, state, and self-employment tax at 15.3% on the first tranche of net earnings, the piece owners forget most often.
- 5Subtract what is already in. April and June payments plus any W-2 withholding, yours or a spouse’s. Divide the remainder across the payments still to come.
Why the quarterly payment is not one-fourth of anything
The September 15 installment has come and gone. If you sent the same number you sent in June without looking at the books, this is worth ten minutes now rather than a surprise in April, because the January 15 payment is the last chance to fix the year, and any shortfall is already accruing interest.
The phrase “quarterly estimated taxes” is misleading in two ways.
First, the periods are not quarters. The third payment covers June 1 through August 31, three months, not four. The fourth covers September through December, which is four. A business with lumpy revenue that divides the year into four equal slices will be wrong every time, and wrong in a way that stays invisible until the return is filed.
Second, the payment is not one-fourth of last year’s tax unless your income is genuinely flat. If you had a strong summer, the September payment should reflect it. If a large customer churned in May, it should reflect that instead. The safe harbor rules give you a floor, not an answer.
The two ways to be safe
There are exactly two positions that protect you from an underpayment penalty, and it is worth knowing which one you are standing on.
Safe harbor based on last year. Pay 100% of the total tax shown on your prior-year return, spread across the four payments. If adjusted gross income on that return was over $150,000 ($75,000 married filing separately), the requirement rises to 110%. This is the simplest position and the right default in a growth year: if you triple your income, safe harbor still protects you, and the balance comes due at filing.
Safe harbor based on this year. Pay 90% of what you will actually owe for the current year. This is the cheaper option in a down year, when paying 110% of a big prior year ties up cash you may need. But it requires a real projection rather than a hope, and it puts the burden of accuracy on you.
There is a third path worth naming because it solves a specific problem: the annualized income installment method, computed on Form 2210 Schedule AI. It sizes each payment to the income you actually earned in that period rather than assuming even earnings across the year. If you make most of your money in Q4, or you had one large closing in a single quarter, this method can eliminate a penalty the standard calculation would impose, because it recognizes you did not have the income yet when the earlier payments came due. It is more work at filing time, and for seasonal businesses it is usually worth it.
How to size the payment from your books
The calculation above runs in about an hour if your books are current, which is the real reason it usually gets guessed at instead. Two details are worth drawing out.
Self-employment tax is the line owners most often leave out of the projection. At 15.3% on the first tranche of net earnings it is not a rounding error, and for a profitable single-member LLC it can exceed the income tax itself.
Withholding behaves differently from estimated payments. Withholding is treated as paid evenly across the year regardless of when it actually happened, which is why increasing withholding for the rest of the year, from your own W-2 job or a spouse’s, is often the cleanest fix for a September shortfall. It can retroactively cure underpayment in earlier periods in a way a January payment cannot.
If you are already behind
The penalty for underpayment is not a flat fee. It is interest, charged per period, at a rate the IRS resets quarterly based on the federal short-term rate.
That structure matters now. The penalty stops accruing the day you pay, so a shortfall caught in September costs materially less than the same shortfall caught at filing. If the calculation says the September payment was light, send the difference rather than rolling it into January. You will not undo the penalty on the periods already missed, but you stop adding to it.
And if the shortfall exists because the cash is not there, that is a working capital problem wearing a tax costume. Solve it as one. Look at collections, at payment timing, at the line of credit, rather than by skipping the payment and dealing with it in April.
Do not forget the state
New York and most other states run their own estimated payment schedule, usually on the same dates as the federal one. Owners who moved between states, or who have nexus in a state they do not live in, tend to discover this late, often at filing, with penalties attached.
If you started selling into a new state this year, the income tax question and the sales tax question both deserve a look before year-end. Nexus is created by activity, not by intent, and the thresholds are lower than most founders expect.
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For informational purposes only. This is general information, not tax or legal advice. Rules change and treatment is fact-specific, so confirm the details with your CPA before you act on them.