Before You Start

This guide assumes you have access to your current year’s Profit & Loss report and a basic understanding of your business income and expenses.

Overview

25 min
Setup Time
Intermediate
Difficulty
Quarterly
Maintenance

What You’ll Learn

  • How to calculate your self-employment tax obligations
  • Identifying and tracking deductible business expenses
  • Properly recording quarterly estimated payments in your accounting software
  • Understanding IRS deadlines and avoiding penalties

1. Understanding Estimated Taxes

If you’re self-employed, you usually pay taxes as you earn or receive income throughout the year. This is done through estimated tax payments.

Who Needs to Pay?

  • Sole proprietors
  • Partners in a partnership
  • Freelancers and independent contractors
  • S-Corp shareholders earning income beyond salary

Key Terms

  • Self-Employment Tax: Social Security and Medicare taxes for self-employed individuals.
  • Adjusted Gross Income (AGI): Your gross income minus certain deductions.
  • Form 1040-ES: Used to figure and pay estimated tax.

2. Calculating Your Estimated Tax

You have a couple of primary methods to estimate your quarterly tax liability.

Method A: Income Forecasting

Based on your current year’s expected income and expenses.

Pros:
  • Most accurate for fluctuating income.
  • Minimizes overpayment or underpayment.
  • Requires regular review of financials.
Cons:
  • Requires more active management.
  • Can be complex for beginners.
  • Needs projections throughout the year.

Method B: Prior Year Safe Harbor Rule

Pay 100% (or 110% if AGI > $150k) of your prior year’s tax liability.

Expert Tip: For new freelancers or those with stable income, the Prior Year Safe Harbor Rule is simpler. However, if your income significantly increases, forecasting is crucial to avoid penalties. Consider using a tool like QuickBooks Self-Employed for automated estimates.

3. Recording Payments in Your Accounting Software

Whether you use QuickBooks Online or Xero, the principle is the same: categorize your tax payments correctly.

Here is a sample journal entry for an estimated tax payment.

{
  "date": "2025-04-15",
  "entry_type": "Journal Entry",
  "lines": [
    {
      "account": "Owner's Equity:Owner's Draw",
      "debit": 3500.00,
      "credit": 0.00,
      "description": "Estimated Q1 Federal Income Tax"
    },
    {
      "account": "Checking Account",
      "debit": 0.00,
      "credit": 3500.00,
      "description": "Payment for Q1 Estimated Federal Income Tax"
    }
  ]
}
  1. 1

    Determine Your Payment

    Based on your calculations from Step 2, decide the amount you need to pay for the quarter.

  2. 2

    Make the Payment

    Pay your estimated taxes electronically via IRS Direct Pay, EFTPS, or through your state tax website.

  3. 3

    Record in QuickBooks/Xero

    Create a journal entry or categorize the bank transaction as an ‘Owner’s Draw’ or ‘Estimated Tax Payment’ to an equity account, not an expense.

  4. 4

    Reconcile Your Bank Account

    Ensure the payment clears your bank and matches the transaction recorded in your accounting software.

Common Error: Categorizing as an Expense

Do not categorize estimated tax payments as a business expense. They are considered draws from owner’s equity or direct payments from personal funds, impacting your balance sheet, not your profit & loss statement.

4. Quarterly Deadlines and Penalties

IRS Payment Deadlines (for calendar year filers)

  • Q1: January 1 to March 31 income – Due April 15
  • Q2: April 1 to May 31 income – Due June 15
  • Q3: June 1 to August 31 income – Due September 15
  • Q4: September 1 to December 31 income – Due January 15 of next year

Underpayment penalties can apply if you don’t pay enough tax throughout the year through withholding or estimated payments. The penalty may be waived in certain situations, but it’s best to aim for full compliance.

Need Help?

Get Tax Support

Struggling with your estimated tax calculations or need help setting up your accounting software? Our expert team can assist.

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