How to Calculate Estimated Tax Payments
Flat design illustration showing a clipboard labeled ‘Quarterly Income,’ surrounded by icons of a calculator, calendar, dollar sign, and checkmarks.
Here’s a simple guide for small business owners and freelancers who want to avoid penalties, surprises, and year-end stress, especially those operating in or around Detroit.
Why Estimated Taxes Matter
For many small business owners, self-employed individuals, and nonprofit leaders with unrelated business income, one of the most confusing parts of tax season isn’t April 15th. It’s the quarterly deadlines in April, June, September, and January.
The IRS requires you to pay tax as you earn income. Now that the third quarter is officially behind us, it’s the perfect time to pause, recalculate, and make sure you’re on track with your estimated payments.
Who Needs to Pay Estimated Taxes
You generally need to pay estimated taxes if:
You expect to owe $1,000 or more when you file your return.
You earn income without regular tax withholding (self-employed, freelancers, independent contractors, S-Corp shareholders, rental property owners, etc.).
You receive dividends, interest, or other income that doesn’t have withholding built in.
This is especially important for small business owners. Ignoring estimated payments now could mean a big, unexpected bill later.
The IRS Safe Harbor Rule
The IRS has two “safe harbor” thresholds. Meeting either protects you from underpayment penalties:
Pay at least 90% of your current year’s tax liability, or
Pay 100% of last year’s tax liability (110% if your adjusted gross income exceeded $150,000).
Why this matters:
As long as you meet one of these thresholds, the IRS generally won’t charge you underpayment penalties, even if you end up owing more when you file your return. That’s the protection part.
But here’s the catch:
Safe harbor doesn’t guarantee that your tax bill will be small (or even manageable).
If your income increases significantly this year compared to last year, you could still owe a large balance at tax time, but you just won’t be penalized for paying late.
For example, one of our clients doubled her business revenue in a single year. She made her quarterly payments based on last year’s income, which kept her penalty-free under the safe harbor rule. But when we filed her return, she still owed several thousand dollars in taxes because her profits had grown so much.
The safe harbor method worked exactly as intended, it protected her from penalties, but it didn’t protect her from the size of the bill.
Think of safe harbor as insurance against penalties, not as a way to avoid writing a big check in April.
That’s why many business owners choose to calculate based on their current year income rather than only relying on last year’s numbers. It may take a little more effort, but it prevents the “sticker shock” moment when tax season rolls around.
How to Calculate Your Q3 Estimated Taxes (The Simple Way)
If you’ve ever tried to use an IRS worksheet to figure out your estimated taxes, you know it can feel unnecessarily complicated. Here’s a simpler way we usually explain it to clients:
Start with your net profit from your quarterly financial statements (that’s your revenue minus business expenses).
Then, multiply that number by your effective tax rate.
For our clients, that percentage is easy to find. It’s listed on the Tax Summary Page of your tax return (the first page of the copy you received).
If you’re not one of our tax clients, don’t worry. You can use the percentage from your tax bracket rate instead. It won’t be perfect, but it should keep any balance due minimal.
If you want a more accurate calculation, reach out to a reputable tax professional. We can calculate your estimated payments based on your actual year-to-date income and projections for the remainder of the year.
The key isn’t to make it perfect, it’s to stay consistent and avoid falling behind.
Common Mistakes We See
Forgetting state or local taxes. Federal taxes are just one layer. Many states, and even some cities, have their own estimated tax requirements. Here in Michigan, that includes the City of Detroit, which requires quarterly estimated payments if you earn income within city limits or operate a business here. Forgetting these can lead to unexpected bills and local penalties you didn’t see coming.
Only using last year’s income. This works if your business looks about the same as it did last year, but if your revenue or expenses have changed, your tax picture has too. Maybe you added new services, increased prices, or hired staff. Using outdated numbers can easily throw your estimates off.
Relying solely on the safe harbor rule. Safe harbor protects you from penalties, but it doesn’t protect you from a big bill. If your business has grown, sticking with last year’s numbers might leave you shocked by what you owe in April. Adjusting your payments each quarter is a better long-term strategy.
Ignoring income spikes. A strong quarter isn’t a bad thing, but if you don’t update your estimated payments after a big jump in revenue, you’re setting yourself up for a surprise later.
Not keeping records of your payments. It’s important to keep track of every estimated payment (both the date and the amount) throughout the year. When it’s time to file your return, this information ensures your payments are applied correctly and you don’t accidentally pay twice or miss a credit.
Waiting until the end of the year to check in. If you wait until tax season to catch up on your bookkeeping or check your numbers, it’s too late to make meaningful adjustments. Reviewing your books quarterly (or even monthly) gives you the chance to fix issues before they become expensive.
Treating estimated payments as quarterly “extras.” Our recommendation? Unless you’re extremely disciplined, make estimated tax payments monthly instead of quarterly. When you treat it like a monthly bill, it becomes part of your regular cash flow routine and you’re far less likely to get behind or feel the pinch of a big quarterly payment.
Final Thoughts
Estimated taxes don’t have to feel like guesswork. They’re simply a way of spreading your tax bill throughout the year so you’re not caught off guard. Now that Q3 is over, it’s the right time to double-check your numbers and make any adjustments before the next deadline. If you’re unsure, don’t wait until January to sort it out! And if you’d rather not calculate it yourself, that’s what we do every day: helping people simplify their taxes so they can focus on growth.