Nobody withholds tax from a 1099 payment. That is the whole story behind the panic. As an employee, every paycheck sent a slice to the IRS before you saw it. Now the full amount lands in your account and the tax on it is your problem, four times a year.
Here is the system, start to finish, with the numbers the IRS actually uses.
Do you have to pay quarterly at all?
Yes, if you expect to owe $1,000 or more when you file. That is the IRS rule for sole proprietors and other self-employed people. With no withholding, almost any profitable side business clears $1,000 fast, because self-employment tax alone is 15.3% of your net profit before income tax even starts.
Below $1,000 you can settle up in April with no penalty. Above it, the IRS wants the money as you earn it.
The four dates
Estimated payments are due April 15, June 15, September 15, and January 15 of the following year. When a date lands on a weekend or holiday it moves to the next business day. Two things trip people up:
- The periods are not equal quarters. The second "quarter" is two months (April and May), the fourth is four (September to December). The IRS calls them periods for a reason.
- The January 15 payment belongs to the year that just ended. Miss it and you have missed a payment for a year you thought was closed.
How much to set aside
Two taxes stack on a sole proprietor's profit:
- Self-employment tax: 15.3% (12.4% Social Security plus 2.9% Medicare), charged on 92.35% of your net profit. It replaces the employer and employee halves of payroll tax you used to split with a boss.
- Income tax on the same profit at your bracket, after the standard deduction and half of the SE tax, which is deductible.
For most first-year sole proprietors that lands between 25% and 30% of net profit. Net, not gross. A $4,000 month with $1,000 of real expenses is $3,000 of profit and roughly $800 to set aside. The "set aside 30% of everything" advice is safe, but it is only right if you have no expenses, and the whole point of keeping books is that you do.
The safe harbor, so you can stop guessing
The IRS does not expect you to predict the year. You avoid the underpayment penalty if your four payments add up to at least 100% of last year's total tax (110% if your prior-year adjusted gross income was over $150,000), or 90% of this year's tax. In year one you have no prior-year self-employment tax to lean on, which is exactly why year one is the scramble. From year two, the prior return is your floor and the pressure drops.
You missed the first one. Now what?
Pay it now. The underpayment penalty works like interest on the late amount for the days it was late. It is not a fine that doubles because you were unaware. A late Q1 paid in May costs less than a Q1 paid in April of next year, so the only bad move is waiting for April. Pay through IRS Direct Pay or your online account and select the correct year and period.
The part the calculators skip: the estimate is only as good as the books
Every quarterly-tax calculator online asks you for your profit so far. That is the number most new sole proprietors do not have. They have a bank balance, a folder of invoices and a phone full of receipt photos. So the estimate gets guessed from revenue, expenses get forgotten, and the September payment is either too high (cash you needed) or too low (a penalty and an April surprise).
The fix is not a better calculator. It is books that are current on the day the payment is due. When every expense is filed as it happens, the profit for the period is a fact, not a guess, and the estimate falls out of it. ClaryBook keeps a running federal quarterly estimate computed from your actual Schedule C profit, with what you have already paid subtracted, so on June 15 the number is simply there.
Books that are current all year, from your phone
Text a receipt or type what you spent. ClaryBook files it under the right Schedule C line, keeps a running quarterly estimate, and hands your accountant a tax package with every receipt attached. $30 a month, 30 days free, no card.
Start freeThe one-page version
- Owe $1,000 or more for the year: pay quarterly.
- April 15, June 15, September 15, January 15. Uneven periods.
- Set aside 25% to 30% of net profit; 15.3% of it is self-employment tax.
- Safe harbor: 100% of last year's tax (110% over $150K AGI) and you cannot be penalised.
- Missed one: pay it today, the penalty is interest-like.
- Keep the books current, so the profit is a fact on the due date.
Related: the five-minute weekly bookkeeping system and every Schedule C expense category, with examples.