If you’re self-employed, taxes aren’t withheld from your income automatically. Instead, the IRS—and your state—expect you to pay taxes throughout the year by making quarterly estimated tax payments. Missing or underpaying these estimates can lead to penalties, interest, and an unwelcome surprise at tax time.

Here’s a clear breakdown of how estimated taxes work and how to stay penalty-free.

Step 1: Estimate your annual self-employment income

Start by projecting your total gross income from self-employment, including 1099 income, consulting, side work, and any other business revenue you expect to earn during the year.

Step 2: Subtract deductible business expenses

Estimate your ordinary and necessary business expenses—such as supplies, mileage, home office, software, insurance, and professional fees. Subtract these from gross income to determine your net business income.

Step 3: Calculate self-employment tax

Self-employed individuals are responsible for self-employment tax, which covers Social Security and Medicare. This tax is generally 15.3% of net income. One-half of this tax is deductible when calculating your federal income tax.

Step 4: Estimate your federal income tax

Using your filing status and projected taxable income, calculate your estimated federal income tax based on current tax brackets.

Step 5: Add federal taxes together

Combine your estimated income tax and self-employment tax to determine your total estimated federal tax liability for the year.

Step 6: Apply IRS safe-harbor rules

To avoid federal underpayment penalties, the IRS generally requires you to pay at least:

90% of your current year’s total tax, or

100% of your prior year’s total tax (or 110% if your prior-year adjusted gross income exceeded IRS thresholds)

Meeting one of these safe-harbor thresholds typically protects you from penalties—even if your income increases during the year.

Step 7: Don’t forget state estimated taxes

Most states with income tax also require quarterly estimated tax payments. While rules and thresholds vary by state, the concept is similar:

You generally must pay a required percentage of your expected state income tax throughout the year.Colorado is a flat 4.40% income tax rate.

States often follow similar safe-harbor rules based on prior-year tax or a percentage of current-year tax.

Payments are usually due on the same quarterly schedule as federal estimates.

Failing to make state estimates can result in state penalties and interest, even if your federal estimates are accurate.

Step 8: Divide into quarterly payments

Once you determine the required federal and state amounts, divide each by four. Estimated payments are generally due:

• April

• June

• September

• January

Estimated taxes don’t need to be perfect—but they do need to be reasonable and proactive.Estimated taxes aren’t just compliance—they’re cash-flow strategy. As income changes, your payments should be adjusted to prevent surprises.

How Pricewise Business Solutions Can Help

At Pricewise Business Solutions, we help self-employed professionals stay ahead of taxes with confidence. Our services include:

• Calculating federal and state estimated tax payments

• Applying safe-harbor rules correctly

• Adjusting estimates as income changes

• Proactive tax planning to reduce surprises and improve cash flow

If you’d like clarity and confidence around your estimated taxes, call 720.949.7733.