Quarterly tax estimates, explained simply

Employees never think about this: their tax comes out of every paycheck automatically. Business owners have no such autopilot. If you expect to owe $1,000 or more in tax for the year, the IRS generally expects you to pay it in four installments - April 15, June 15, September 15, and January 15.

Why owners get surprised

Skip the installments and two things happen: a penalty for underpayment, and a painful April when a full year of tax lands at once. Most owners we meet were never told estimates existed - they were not avoiding tax, they were blindsided by the schedule.

The simple way to stay ahead

• ✓Keep your books current - an estimate built on last year's guess is how surprises happen.
• ✓Set aside a fixed percentage of every payment you receive, in a separate account you do not touch.
• ✓Review the estimate each quarter against what you have actually earned, and adjust.
• ✓Pay on time even if the amount is imperfect - a close estimate paid beats a perfect one paid late.

That is the whole system. The hard part is not the math - it is knowing your real profit during the year, which is exactly what current books give you. If your estimates feel like astrology, the fix is not a better guess; it is better books.