Quick overview
Estimated taxes are the quarterly payments you make to the IRS when you expect to owe tax of $1,000 or more at filing time and you don’t have enough tax withheld during the year. For a sole proprietor, estimated taxes cover both income tax and self-employment tax (Social Security and Medicare contributions). The IRS requires these payments so taxes are collected throughout the year instead of in a single lump sum.
(Official IRS guidance: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes; Form 1040-ES: https://www.irs.gov/forms-pubs/about-form-1040-es.)
Why this matters for new sole proprietors
As a sole proprietor you are taxed as an individual on net business profits. Net earnings of $400 or more from self-employment generally require you to file Schedule SE and pay self-employment tax (Social Security and Medicare). If you expect to owe $1,000 or more in federal tax after credits and withholding, the IRS expects quarterly estimated payments. Missing payments or underpaying can trigger penalties and interest (see IRS Estimated Taxes page).
In my practice advising small-business owners, I see three common problems: underestimating quarterly tax, mixing personal and business cash, and waiting until year-end to reconcile taxes. Regular, deliberate estimating avoids cash surprises and penalties.
Step-by-step: how to calculate estimated taxes (practical method)
- Forecast your annual gross income.
- Use sales forecasts, contracts, historical income, or conservative assumptions for a first-year business.
- Estimate deductible business expenses.
- Include all ordinary and necessary costs (supplies, software, home-office portion, mileage). For authoritative guidance, see IRS Publication 535: https://www.irs.gov/pub/irs-pdf/p535.pdf.
- Compute estimated net profit.
- Net profit = gross income − business expenses.
- Calculate self-employment (SE) tax.
- Estimate net earnings subject to SE tax by multiplying net profit by 0.9235 (this adjusts for the employer-equivalent portion you’re allowed to deduct when computing SE tax). Then multiply that result by 15.3% to estimate SE tax (12.4% Social Security up to the wage base and 2.9% Medicare; an additional 0.9% Medicare surtax may apply if your income exceeds statutory thresholds).
- Example: Net profit $50,000 → net earnings for SE tax = $50,000 × 0.9235 = $46,175. SE tax ≈ $46,175 × 0.153 = $7,063.
- Estimate income tax on taxable income.
- Taxable income = net profit − (half of SE tax as an adjustment to income) − standard deduction (or itemized deductions) − other adjustments/credits.
- Use current individual income tax brackets for 2025 when available; otherwise use conservative marginal-rate estimates (e.g., 10%–37% scale depending on income).
- Example (simplified): Net profit $50,000 − half SE tax ($3,531) − standard deduction (single filing, 2025 amount may change) = approximate taxable income. Apply tax brackets to compute income tax.
- Add SE tax and income tax.
- Total estimated annual tax = estimated income tax + estimated SE tax.
- Subtract expected withholding and credits.
- If you or a spouse has W-2 wages with withholding, subtract expected withheld amounts.
- Divide remaining tax into quarterly payments.
- Standard approach: pay 25% of the balance for each quarter (or recompute payments if income is uneven).
- Account for safe-harbor rules to avoid penalties.
- To avoid an underpayment penalty, pay either:
a) 90% of the current year’s tax liability, or
b) 100% of the prior year’s tax liability (110% if your adjusted gross income on the prior return was over $150,000). - These rules are explained on the IRS site and in the “Safe Harbor Rules for Estimated Tax Payments” guidance.
Example calculations
Example A — steady income (first-year forecast)
- Forecast net profit: $60,000
- Net earnings for SE tax: $60,000 × 0.9235 = $55,410
- SE tax: $55,410 × 0.153 ≈ $8,474
- Half SE tax deduction (above-the-line): $4,237
- Taxable income estimate: $60,000 − $4,237 − standard deduction (assume single; check current amount) ≈ $…
- Estimated income tax (apply brackets) say $6,000
- Total estimated tax: $6,000 + $8,474 = $14,474
- Quarterly payment: $14,474 / 4 ≈ $3,619
Example B — irregular income (seasonal work)
- If you expect lumpy income, compute estimated tax for each quarter based on expected income during that period and pay accordingly. The IRS allows unequal payments that match your actual income timing; this reduces underpayment risk for seasonal earnings.
Payment schedule and methods
Calendar due dates are generally:
- 1st payment: April (for Jan–Mar)
- 2nd payment: June (for Apr–May)
- 3rd payment: September (for Jun–Aug)
- 4th payment: January of the following year (for Sep–Dec)
Exact dates can shift when weekends or legal holidays fall on due dates—check the IRS estimated tax calendar each year (Form 1040-ES instructions).
Payment methods:
- IRS Direct Pay (from checking/savings) — quick and free.
- Electronic Federal Tax Payment System (EFTPS) — recommended if you prefer scheduled payments and a full payment history (site: https://www.eftps.gov).
- Pay by credit or debit card (fees may apply).
- Mail a payment with Form 1040-ES voucher.
Use EFTPS or Direct Pay for the best record-keeping. Keep receipts/screen shots of payment confirmations.
Safe-harbor strategies and avoiding penalties
- Use the safe-harbor rule (100% or 110% of prior-year tax) if you expect large swings in income and want to avoid penalties.
- Increase withholding on any W-2 job instead of making larger estimated payments if you or your spouse has wage income; withholding is treated as paid evenly through the year, which can eliminate underpayment penalties.
- Recalculate estimates mid-year if revenue or deductions change materially.
For detailed rules on penalties and underpayments see: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes and our internal guide on Safe Harbor Rules for Estimated Tax: Avoiding Penalties.
Recordkeeping and software tips
- Track income and expenses weekly or monthly. Use a simple spreadsheet or accounting software (QuickBooks, Wave, FreshBooks).
- Capture receipts and mileage contemporaneously; lost receipts create audit headaches and missed deductions.
- Retain quarterly worksheets and payment confirmations for at least three years.
If you need specialized guidance for irregular or gig income, our guide on Quarterly Estimated Taxes: How to Forecast When Income Is Irregular explains practical forecasting techniques.
When to consult a tax pro
Consider hiring a CPA or enrolled agent if any of these apply:
- You expect complex deductions or retirement contributions.
- You plan to change business structure (Sole proprietor → S corporation, LLC taxed as S corp).
- You received 1099s from many clients and want to avoid misclassification risks.
In my experience, a one-hour consult early in the year to set up a projection and payment plan often saves more than it costs by reducing penalties and improving cash flow.
Common mistakes to avoid
- Waiting until year-end to estimate taxes.
- Mixing personal and business accounts (use a separate business account).
- Forgetting the SE tax and only calculating income tax.
- Assuming safe-harbor always protects you—confirm the 100%/110% rule applies in your case.
Quick checklist for each quarter
- Update revenue and expense estimates.
- Calculate net profit and SE tax for the period.
- Use Form 1040-ES worksheet to recompute required payment.
- Make the payment (Direct Pay or EFTPS recommended).
- Save confirmation and update your records.
Final notes and resources
This article explains the federal estimated tax process for sole proprietors. State estimated tax rules vary—check your state revenue department or our article on State Residency Rules: When You Owe Taxes to Multiple States if you work in more than one state.
Authoritative IRS resources:
- IRS — Estimated Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
- IRS — Form 1040-ES (instructions and vouchers): https://www.irs.gov/forms-pubs/about-form-1040-es
- IRS Publication 334, Tax Guide for Small Business and Publication 535 for business expenses.
Disclaimer: This content is educational only and does not replace tax advice from a licensed professional. For guidance tailored to your situation, consult a CPA or enrolled agent.
