When you leave a job to run your own business, the paycheck stops and so does the withholding. Nobody takes tax out before the money reaches you. The IRS’s answer is estimated tax: you pay as you earn, in installments, instead of in one lump at filing time.
This guide covers what the IRS says about who owes it, what it includes and how to avoid a penalty. It does not give you a payment calendar, because the due dates are set by the IRS each year and the authoritative list is Form 1040-ES.
Who has to pay
The IRS says individuals “generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.” Corporations have a $500 threshold. The IRS also says most taxpayers avoid the penalty if they “owe less than $1,000 in tax after subtracting their withholding and refundable credits.”
In practice that threshold catches most people with real self-employment income. If you also have a day job with withholding, that withholding counts toward the calculation.
It is more than income tax
The IRS notes that estimated tax covers “other taxes such as self-employment tax,” not just income tax. Self-employment tax is how you cover both halves of Social Security and Medicare that an employer would normally split with you.
Per the IRS:
- “The self-employment tax rate is 15.3%,” made up of 12.4% for Social Security and 2.9% for Medicare.
- It applies if your net earnings from self-employment were $400 or more, and you calculate it on Schedule SE.
- For 2026, the first $184,500 of combined wages, tips and net earnings is subject to the Social Security portion.
- You can deduct the employer-equivalent portion of self-employment tax in figuring your adjusted gross income.
This is why a first-year founder is often surprised by the size of the bill: it is income tax plus a payroll tax that used to be invisible.
The four payments
The IRS says “the year is divided into four payment periods,” each with its own due date, and that taxpayers generally “should make estimated tax payments in four equal amounts to avoid a penalty.” If a due date lands on a weekend or holiday, a payment made the next business day is on time. Look up the current dates on Form 1040-ES rather than relying on a blog post, including this one.
How not to get penalized
The IRS says you “may have to pay a penalty for underpayment of estimated tax.” The safe harbor it describes is simple: you generally avoid it if you paid at least 90% of the tax for the current year or 100% of the tax shown on your prior-year return, whichever is smaller.
The second test is the useful one for a business with lumpy revenue. You can base your payments on last year’s return and not on a forecast of this year’s income. The catch is that a good year still leaves a balance due at filing time, so set money aside for it. Form 2210, “Underpayment of Estimated Tax by Individuals, Estates, and Trusts,” is the form the IRS points to for figuring out whether you owe a penalty. The IRS also says it may waive the penalty in some cases, such as a casualty or disaster.
How to pay
Per the IRS, you can:
- Mail Form 1040-ES with your payment.
- Pay online, by phone or from your mobile device using the IRS app.
- For businesses, use Direct Pay for businesses and your business tax account for most payments. Some business payments must still go through EFTPS.
Keep a record of each payment. When you file, they are credits against what you owe.
Where this fits with the rest of setup
Estimated tax depends on how your business is structured. A sole proprietor and a single-member LLC owner generally report business income on a personal return, which is where this comes in; our guide to LLC versus sole proprietorship covers the difference. If you elect corporate tax treatment, the rules shift, and our S corp election guide explains why reasonable wages matter. And if you are deciding what to take out of the business each month, see how to pay yourself. A separate business bank account makes the income side of this much easier to document.
Frequently asked questions
Who has to pay estimated taxes?
The IRS says individuals generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Corporations have a $500 threshold.
What is the self-employment tax rate?
The IRS says the self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. It applies when your net earnings from self-employment were $400 or more, and you calculate it on Schedule SE.
How do I avoid an underpayment penalty?
The IRS says most taxpayers avoid the penalty if they paid at least 90% of the tax for the current year or 100% of the tax shown on the prior year’s return, whichever is smaller. Form 2210 is used to figure whether you owe a penalty.
How do I pay?
The IRS says you can mail Form 1040-ES with your payment, or pay online, by phone or from your mobile device using the IRS app. Some business tax payments must go through EFTPS.
Sources: IRS, “Estimated taxes,” “Self-employment tax (Social Security and Medicare taxes)” and Tax Topic 306. This is general information, not tax advice; state estimated-tax rules differ, so confirm with the IRS, your state revenue agency or a tax professional.