If you own a business, the third-quarter estimated tax payment is due September 15. If you’re like most owners we meet, the number you’re about to pay is last year’s tax bill divided by four, and you’ll find out in April whether it was anywhere close.
We run an accounting firm, and we want to explain something most owners have never been told: an estimated payment is a bookkeeping number. Whether the September number is right depends almost entirely on whether your books are current through August. Here’s how it actually works, and what to ask for.
The IRS charges an underpayment penalty if you don’t pay in enough during the year. You avoid the penalty if your payments cover either:
Most accountants set your quarterly payments to the first option, because it doesn’t require knowing anything about this year. That’s fine as a penalty shield. It is not an estimate of what you owe.
If your business is up 40% this year, the safe-harbor payments will keep you out of the penalty and still leave you with a five-figure balance due in April. If your business is down, you’ll overpay all year, which is an interest-free loan to the Treasury while you’re paying interest on your line of credit. Either way, the payments were “made,” and the number was still wrong.
To tell you what you actually owe for the third quarter, your accountant needs five things, all through August:
If your accountant hasn’t asked for any of that, they’re using last year’s number divided by four.
Annualized income. If your income is seasonal or back-loaded (a contractor whose big jobs close in Q4, a retailer with a holiday season, a landlord selling a property in November), the IRS lets you pay each quarter based on what you’ve actually earned so far, rather than a quarter of the whole year. That’s Form 2210, Schedule AI. It can move real money from September to January without a penalty. It only works if your books can show year-to-date income at each quarter end, which is the point of this article.
S-corp withholding. If you’re an S-corp owner on payroll, extra withholding in the last few paychecks of the year counts as if it were paid evenly across all four quarters. That means an underpayment discovered in October can be fixed through December payroll with no penalty. It’s the single most useful correction tool available, and it’s only usable if someone is looking at your numbers in the fall.
Our clients’ books close every month, so the September estimate is a fifteen-minute exercise: year-to-date profit, projected through December, tax computed, payments and withholding subtracted, balance split across what’s left. The client gets the number and one sentence explaining why it moved. No April surprise, no interest-free loan to the government. If your September payment is a guess, reach out. We’ll tell you honestly whether the number is close.
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