Small Business Taxes - What Are Quarterly Estimated Tax Payments and Why Must You Pay Them?

If you are a sole proprietor, a self-employed person or an independent contractor, you are faced with the probability of making federal quarterly estimated tax payments.

These are called "quarterly" payments, but don't that word fool you. In typically confusing IRS jargon, here are the due dates:

1st Quarter payment is due April 15. (So far, so good. The first quarter corresponds with the calendar quarter.)

2nd Quarter payment is due June 15. (Confused? You should be, because the 2nd quarter, for purposes of these estimated tax payments, is only 2 months long - April and May.)

3rd Quarter payment is due September 15. (Please stick with me here. The 3rd quarter is the months of June, July and August. But hey, at least it's three months long.)

4th Quarter payment is due January 15. (The 4th quarter is four months long. Don't ask me why. Maybe it has something to do with the 2nd quarter only being two months long?)

You make these quarterly payments electronically via EFTPS (the IRS Electronic Federal Tax Payment System) or by mail with Form 1040-ES. The current version of the form is available at the IRS website, along with detailed instructions on how to fill it out.

Perhaps you are wondering, "Why do I have to make these quarterly payments? Why can't I just wait until the end of the year and pay the tax all at once, when I know exactly how much I've made and how much tax I owe?"

Good questions. Let's take a crack at some answers.

You can't wait until the end of the year to pay your tax for the same reason that an employee isn't allowed to wait until the end of the year to pay his/her tax. Our federal income tax system is a "pay-as-you-go" system. The law requires employers to withhold tax from every employee paycheck. Likewise, self-employed people must pay in during the year, and in it's infinite wisdom, the government has decided that making four payments is often enough.

And when you think about it, paying four times during the year is more practical than waiting until the end of the year. How many people would have the self-discipline to put aside enough to cover their taxes? Wouldn't many people spend it all and have little or nothing left to pay the tax when the year is over?

So the quarterly estimated tax payment system, while far from perfect, does make sense, both for the government and for the self-employed taxpayer. Most states have similar rules regarding estimated tax payments, so be sure to check with your state's income tax department for details on their requirements.