The video explains how federal quarterly estimated tax payments work for self‑employed individuals and other non‑W‑2 earners. It first clarifies that the discussion is limited to federal income tax, not payroll or sales taxes, and notes that W‑2 employees have taxes withheld by their employer, so they are not subject to quarterly payments. The presenter outlines the IRS’s four payment deadlines (April 15, June 15, September 15, and January 15) and describes how the underpayment penalty is calculated based on the total amount prepaid for the year versus the actual tax liability, not the timing of each payment. Two practical approaches are presented: (1) the simple method of making the four quarterly payments on schedule, which suits people who struggle to set aside money; and (2) a “Profit First”‑style method where a dedicated tax‑reserve bank account is funded regularly, and a single payment is made in December after 11 months of actual income data are known, reducing the risk of over‑paying and allowing year‑end tax‑planning strategies. The speaker discusses cash‑flow trade‑offs, such as the danger of over‑paying if Q4 is weak, and the benefit of retaining tax money longer to fund strategic moves. The video concludes by summarizing the two options and noting that Incite Tax can assist depending on the client’s service level.
Chapters
How do quarterly estimated tax payments work? Now it's important to note what we are referring to here is your income tax payments. If you have payroll tax filings that are owed, if you have sales tax, those are separate. That's not what we're covering here. We're talking about your federal income tax quarterly payments. Now, when someone's a W-2 worker, out of every paycheck, the company is withholding an income tax. The IRS doesn't care about quarterly tax payments for people who are W-2 workers. Workers only. Once you have a business and you're self-employed, the IRS has this expectation that you're going to figure out what you owe in taxes every quarter and then send them a payment. The reason one would want to do this is because the IRS has what they call an underpayment penalty, meaning what did you owe in taxes for the year compared to what did you prepay in those through estimated quarterly payments? If you're under the amount that you owe, they technically have an underpayment penalty. However, they also look at this underpayment penalty based on what did you pay in for the whole year, not necessarily the timing of when those payments happened. That will matter in a minute when I explain a little bit more. But let's talk about the technical aspect of how this works. At the end of every quarter, if you're self-employed, meaning you have a business, That's not income earned from just W-2. The IRS gives you an option to make payments. So the dates are April 15th, June 15th, September 15th, and then January 15th. Given on weird dates and holidays, sometimes that falls on a 16th, 17th, or 18th. But for the sake of understanding it, we're just talking about the 15th. That means if I'm a self-employed person, The IRS wants me to figure out what do I owe in taxes, and then I make a payment on April 15th based on what I think I owe in taxes from January 1st to March 31st. And then from April 1st to June— April, May, June, right?— then I make a payment on June 15th, etc., etc., etc. Hence the April 15th, June 15th, September 15th, and January. The underpayment penalty is what we are trying to avoid. The IRS is going to figure out If you owe an underpayment penalty based on what did you prepay in income tax between January 1st to January 15th of the following year, everything you prepaid during that time period, compare that to what you owe in taxes. If you were short, they technically are going to charge you an underpayment penalty. Now again, I want to avoid unnecessary taxes whenever possible. However, I also want to have cash to run my business, to sustain my life. So I wanna make sure that I'm explaining all the options to you when it comes to quarterly estimated tax payments. Now, if you find yourself in the category of a person who isn't very good at saving money, which means you're gonna run the risk of spending what you owe in taxes on other things, Then I do recommend for simplicity, just make estimated payments on the deadlines for the 4 different quarters. Now, if you find yourself in the category of, hey, I can save money and I won't be tempted to spend it, then I recommend a different method. And this is the method that I do. So I use Profit First, which is a cash flow management system that hopefully you learned about. If you haven't, it's a game changer. What that means is that as part of my cash flow management system, I have a bank account that I set set aside specifically for income tax. And every time I sit down and manage my money, which for me is twice a month, I put a little bit of money into this tax account. So over the course of the year, this tax account grows. Now, when I get to December, I'm going to run a tax estimate and do some tax planning to see what do I owe in taxes. The reason this is helpful is because at that point, 11 months have already happened. So I know what my tax outcome likely can be on 11 months of real data, and I only have to estimate 1 month. So I can estimate what do I owe in taxes, and based on that amount and the fact that I've been setting aside money, I'm going to make 1 payment and I'm gonna do it in December. This also helps when you're estimating state taxes because sometimes you can get a tax break for paying state income tax, but I don't wanna go too much into that. I wanna focus on how these estimated payments work. Okay, so I've saved money, I estimate what I owe in taxes, and I make a payment by December 15th. Now, if my December 15th payment ends up being short, I will have an underpayment penalty. If my December payment is equal to or greater than the estimated vouchers that I had, that my professional, my— in this case myself, gave me, and I made those payments, then I also would avoid an underpayment penalty. So really the situation we get into trouble is if you owe less than what you owed last year and you didn't come close to paying that amount. That's usually where the underpayment penalty falls into place. Now that being said, look, I could have a really great quarter and then I could have a disastrous quarter. What happens if my Q4 is really, really bad? Well, usually that means really, really bad means I'm not making a profit. In fact, I potentially have A tax loss, meaning I have more expenses than I have income coming in. If I've been sending payments to the IRS every quarter based on 3 really good quarters, and then I have 1 bad 4th quarter, I've overpaid, I've over-prepaid in my calculation, but I don't get that money back until I file my tax return. So I've now increased my chance of having a cash shortfall If something bad happens in my business that wasn't planned for, that's why I prefer to hold on to all my tax money myself all year long and then to make one payment in December. Because again, at that point, I can look at what actually happened for 11 months and then make an estimate once or estimate December only. Less of a chance that I'm gonna massively overpay. It also gives me a chance to play with some year-end strategies. You know, maybe I have 20 grand saved up in my tax account, and there's a cool strategy. I can do or something that it's going to cost me $5,000, but it ends up saving me a few thousand in taxes, I can use part of my tax money in that account to do that. So that's a lot of information. Let me just summarize for you. If you want to keep it simple, feel free to just make those quarterly payments April 15th, June 15th, September 15th, or— and January 15th. That's the simplest way to do it. If you're like me and you'd prefer to hold on to your money as long as possible, while also giving you the best chance to avoid an underpayment penalty, then I recommend setting aside the money in a separate bank account and then making one payment in December. We can help you with all of that depending on your service level. That may already be included, or it may be a slightly extra cost, but those are your 2 basic options that you should be aware of. And that's how quarterly estimated payments work.
