“Why Do I Have to Pay My Taxes Quarterly?”

Entrepreneurialism

Jul 10

Over a mango refresher at a local cafe, I helped a friend categorize her business transactions in QuickBooks.

We also reviewed how these transactions appear on the Profit & Loss (P&L) Statement, and which number to use to calculate taxes (net income).

I gave her a quick overview of how to calculate her quarterly taxes, and pointed out to keep an eye on deadlines, because IRS quarters are whack.

Her face looked like the grimacing emoji.

She hadn’t been paying her taxes quarterly, she’d been paying them yearly when she filed her annual return.

I’m not an accountant, but since starting my business in 2013, it’s been drilled into me by advisors, tax professionals, and Google search results to pay my taxes quarterly. But I never knew what the consequence was for not doing so. I assumed a massive fine, and as a rule follower, I wasn’t about to skip a quarterly payment to find out.

But my friend had never received a penalty notice, which left me perplexed. And inspired to actually look into the consequences of not paying quarterly taxes.

According to the “Estimated taxes” article on the IRS website, “Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments.”

As an employee, your income tax is withheld from your paychecks and paid to the IRS by your employer. As a self-employed individual, you have to make estimated tax payments directly to the IRS.

Why are self-employment taxes so high? →

Later in the article, it’s explained that the year is divided into four payment periods (what we typically refer to as “quarters”), and as I noted above, these quarters are not your standard three month increments:

Q1 is January through March with a tax due date around April 15, depending on whether that falls on a weekday or weekend day. Q2 is April and May with a tax due date around June 15, Q3 is June through August with a due date around September 15, and Q4 is September through December with a due date around January 15 of the following year.

Payments can be made on the IRS website or by mail. Because my business is set-up as a a limited liability company (LLC), I go to irs.gov/payments and direct pay with my bank account.

It’s a quick process. There’s an online form that will ask for some personal information and then your bank account information along with the amount you’d like to pay. Paying estimated taxes is just a payment, there’s no big to do like filing an annual return. You don’t have to enter your income and expenses, just the amount you’d like to pay. Which, annoyingly, you have to calculate yourself or pay an accountant to calculate for you.

But what happens if you don’t make these estimated payments quarterly, you make one single payment with your annual return at the end of the year?

In typical IRS fashion, the consequence is vague.

According the “Estimated taxes” article, “Making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.”

Emphasis on “may have to.”

The only clarity is the next line that reads, “Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers, fishermen, and certain higher income taxpayers.”

If you want the full lowdown, the article refers you to Publication 505, which has an index that requires several scrolls to reach the bottom of. Something I’d recommend hiring an accountant to decipher for you.

But what is the actual penalty?

The IRS considers making a single annual payment instead of quarterly estimated payments an underpayment of estimated taxes (unless you owe less than $1,000 at the end of the year).

According to the “Underpayment of estimated tax by individuals penalty” article on IRS.gov, the penalty is calculated based on the amount of the underpayment, the period when the underpayment was due and underpaid, and quarterly interest rates for underpayments.

On the “Quarterly interest rates” article on IRS.gov, the interest rate is 7% for Q1, Q2, and Q3 of 2025 for non-corporate entities (ex. “individuals” that encompasses sole proprietors and LLC owners).

And that 7% accumulates from the date of the estimated tax deadline you missed, so if you missed or underpaid your Q1 taxes, the interest would start accruing around the June 15 payment deadline — and you likely won’t know about it until after you’ve filed your annual return the following year!

One of my top rules for running my business is to not mess with the IRS. Their penalties are exorbitant and the interest accrues rapidly.

And if you don’t pay these penalties and interest, the IRS can seize wages, Social Security benefits, retirement income, and assets (cash in bank account, real estate, cars, boats, etc.).

While the IRS offers payment plans, interest continues to accrue while you’re making the payments, extending the time it takes to pay off your initial penalty.

Ain’t nobody want to pay the IRS more than they have to — or lose their house to it.

While I advise DIYing much of what your business needs to operate, especially if you’re just starting out or a solopreneur, working with a bookkeeper and/or an accountant is one of the few things I recommend investing in.

It could also pay off, as accountants can point out write-offs and credits you may not have known about.

Plus, they can remind you when your quarterly taxes are due — and let you know what you owe.

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