Estimated Taxes: What They Are and How to Stay on Track

If you’re self-employed or have significant income outside of a regular paycheck, chances are you’ve heard the term “estimated taxes.” But what exactly are they, and why do they matter? Understanding estimated taxes is crucial to avoid penalties, stay financially organized, and ensure you’re not caught off guard come tax season. In this post, we’ll break down everything you need to know — including what estimated taxes are, who must pay them and how to calculate them (including Safe Harbor rules), penalties to watch for, special considerations for Kansas and Missouri residents, tips to stay organized with due dates, and guidance to keep your payments on track throughout the year.

Who Needs to Pay Estimated Taxes & How to Calculate Them

Estimated taxes are quarterly payments you make to the IRS (and your state) to cover income not subject to withholding. Unlike regular employees, who have taxes automatically deducted from their paychecks, self-employed individuals, contractors, investors, and some business owners must plan ahead and pay these taxes themselves.

You may need to pay estimated taxes if you:

• Expect to owe $1,000 or more at tax time after accounting for withholding and credits

• Have income from sources not subject to withholding, such as freelance work, contract income, rental properties, dividends, interest, or side jobs

• Operate a business or receive pass-through income from an S-corp, partnership, or LLC

Once you determine you need to pay estimated taxes, the next step is calculating how much. There are two easy options:

1. Safe Harbor Method (Easiest & Most Common)

Safe Harbor helps you avoid underpayment penalties, even if you end up owing more at tax time. You’re covered if you pay:

• 100% of last year’s total tax (110% if your AGI was over $150,000) or

• 90% of the current year’s tax, whichever is lower

  
  

Safe Harbor for C-Corporations

C-corps can use last year’s tax for Safe Harbor only if they are not considered a "large corporation":

• Taxable income did not exceed $1 million in any of the past 3 years→ Can use prior-year tax as Safe Harbor

• More than $1 million→ Must pay based on current-year tax to avoid penalties

• Large corporations are permitted to rely on prior year tax for their Q1 estimated payment, but they are required to correct any underpayment with the Q2 installment

  
  

(S-corps and partnerships do not use this corporate test because the owners pay tax, not the business.)

2. Current-Year Estimate Method

If your income varies or increased significantly, you may prefer to calculate your estimated tax based on this year’s expected income, credits, and deductions. Most taxpayers estimate this by using:

• Last year’s tax return as a baseline

• Year-to-date income

• Expected annual income

• Known deductions and credits

• IRS Form 1040-ES worksheets

Kansas & Missouri SALT Parity (PTET)

Both Kansas and Missouri allow pass-through businesses (S-Corps and partnerships) to elect the Pass-Through Entity Tax (PTET). This allows the business to pay state income tax on behalf of owners.

Benefits include:

• Avoiding the federal SALT cap

• Allowing the tax to become a business-level deduction

• Owners receive a state credit for what the business paid

If you own a business in Kansas or Missouri, this election may provide significant tax savings. The state of Kansas requires quarterly estimated payments of PTET after the first electing year. Missouri currently does not require quarterly estimate payments on PTET.

Penalties for Not Paying Estimated Taxes

Failing to pay enough estimated taxes—or paying them late—can lead to IRS penalties, even if you pay the full amount by April 15. Here’s what you need to know:

How Penalties Are Calculated

The IRS calculates penalties based on:

1. How much you underpaid: The difference between what you should have paid and what you actually paid each quarter.

2. How long the payment was late: Penalties accrue from the original due date until the payment is made.

3. Interest rates: The IRS adds interest on the underpaid amount, which changes quarterly.

   
   

Common Situations That Trigger Penalties

• Paying less than 90% of your current year’s tax

• Paying less than 100% of last year’s tax (110% if AGI > $150,000) and not using Safe Harbor

• Making payments after the quarterly deadlines

• Underestimating business income or investment gains

How to Avoid Penalties

• Use Safe Harbor rules to base payments on last year’s tax or 90% of this year’s tax.

• Review your income quarterly and adjust payments if your income increases.

• Increase W-4 withholding if you’re a W-2 employee to cover extra income.

• Make catch-up payments as soon as you realize underpayment.

• Keep accurate records of all income streams, deductions, and credits.

• Consult a CPA to calculate estimated taxes accurately, especially if you have business income or multiple income sources.

Tips for Staying on Track With Estimated Taxes (Including Due Dates)

Staying organized with estimated taxes helps you avoid surprises and penalties. Here are simple tips to keep you on track:

Know Your Quarterly Due Dates

Estimated tax payments are due four times a year:

• April 15 – for income earned Jan 1–Mar 31

• June 15 – for income earned Apr 1–May 31

• September 15 – for income earned Jun 1–Aug 31

• January 15 (next year) – for income earned Sep 1–Dec 31

  
  

If the date falls on a weekend or holiday, the due date moves to the next business day.

Managing estimated taxes doesn’t have to be stressful or confusing. By understanding who is required to pay, calculating your payments accurately (including using Safe Harbor rules), staying aware of quarterly due dates, and considering special situations like Kansas and Missouri SALT Parity, you can avoid penalties and maintain control of your finances throughout the year. Consistently tracking income, reviewing estimated payments each quarter, and keeping accurate records are key steps to ensure you stay on track. Even small adjustments early in the year can prevent larger surprises at tax time.

If you would like to review your estimated tax strategy, clarify any IRS rules, or get personalized guidance tailored to your situation, email jessica@fpgtax.com or call (816) 941-2900 to schedule a meeting or phone call. Taking action now can help you save time, reduce stress, and avoid unnecessary penalties later.