Withholding handles tax on wages. Business income, partnership income and S corporation income arrive with no withholding, so the owner pays during the year through estimated tax. A CPA firm's job is to set a payment amount that avoids the underpayment penalty without trapping cash the client needs to run the business. This article explains the rules the IRS publishes for estimated tax and a workable planning process.
Who has to pay
The IRS says individuals, including sole proprietors, partners and S corporation shareholders, generally must make estimated tax payments if they expect to owe $1,000 or more in tax when their return is filed. Corporations generally must pay if they expect to owe $500 or more. Most taxpayers avoid the underpayment penalty if they owe less than $1,000 after subtracting withholding and credits.
Installment dates
The year has four payment periods. For 2026, individuals pay on April 15, June 15 and September 15, 2026, and January 15, 2027 according to Publication 509. When a due date falls on a weekend or legal holiday, a payment made the next business day is on time. For mailed payments, the U.S. postmark date counts as the payment date. The full 2026 calendar is in federal tax due dates and extensions for 2026.
The safe harbor concept
A taxpayer avoids the underpayment penalty by paying enough during the year. The IRS states the general rule: pay at least 90 percent of the tax shown on the 2026 return or 100 percent of the tax shown on the 2025 return, whichever is smaller, and the 2025 return must cover all 12 months. The 100 percent becomes 110 percent when adjusted gross income on the 2025 return was more than $150,000 ($75,000 if the 2026 filing status is married filing separately). Publication 505 covers that rule, the annualized income installment method and special cases. Confirm the thresholds there before putting any number into a client letter.
The planning value of the prior-year safe harbor is predictability. The client pays four equal installments sized from the filed prior-year return and does not need an in-year forecast to be penalty-safe. The cost is that a client with falling income pays more than needed. The planning value of the 90 percent of current-tax approach is the reverse. The client pays only what the current year requires, and the firm accepts the burden of maintaining a forecast.
Corporations
Corporations calculate the underpayment penalty on Form 2220. The $500 threshold above is the point at which a corporation generally has to make estimated payments. For a calendar-year corporation the installments fall on April 15, June 15, September 15 and December 15, 2026. A C corporation client should have its estimated payments tied to the tax provision. If the provision for the interim period changes materially, the next installment should change too.
Pass-through owners
For partners and S corporation shareholders, the owner's estimate depends on income the owner does not control and often does not see until the Schedule K-1 arrives. The firm should ask for entity income projections each quarter. Distributions are not the same as income. An owner who receives little cash can still owe tax on a large allocation. A payment plan should start from the allocation, not from the distribution. See S corporation reasonable compensation for how wages and distributions interact with the owner's tax.
Some states offer an entity-level tax election, covered in the glossary entry on pass-through entity tax. Payments of that tax have their own timing and should be tracked separately from federal estimates.
A quarterly planning process
- Year-end calendar. Send each client the four installment dates, with the amount and the method.
- Quarterly refresh. Ask for year-to-date profit and loss and any known changes such as asset sales, large purchases, new contracts or ownership changes.
- Choose the method. Use the prior-year approach for stable clients. Use a 90 percent of 2026 tax calculation or the annualized method where income is lumpy or seasonal.
- Add state and local. Federal estimates are only part of the picture. Record state requirements per jurisdiction.
- Confirm payment. Keep proof of each payment in the workpapers and reconcile to the client's bank statements.
- Re-run at year end. Before December 31, re-run the projection and decide whether the final installment should be increased.
Interaction with extensions
An extension to file does not extend the time to pay. The IRS says tax owed must be paid by the April filing date, and the extension covers only the return. A client who underpaid estimates and then extends the return should expect penalties and interest on the shortfall. Include a payment estimate with every extension.
Documentation an auditor will look for
When the firm also provides assurance to the client, the income tax provision and the tax payable or receivable balance should reconcile to estimated payments made. Overpayments carried forward are an asset that needs support, and underpayments are a liability. See ASC 740 income taxes for private companies.
FAQ
Do S corporations pay estimated tax?
The S corporation generally passes income through, so the shareholders pay estimated tax on their share. The entity can owe tax on certain built-in gains and passive income.
What if income is uneven during the year?
Publication 505 describes an annualized income installment method that matches payments to when income was earned. An individual who uses it files Form 2210 and completes Schedule AI, which is in the Form 2210 instructions.
Is the postmark date the payment date?
For mailed payments, yes. The IRS says the U.S. postmark date counts as the payment date.
CORAA prepares ready-to-review audit files for US CPA firms; see /us.
Sources
- IRS, Estimated taxes: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes
- IRS, Publication 505 (2026), Tax Withholding and Estimated Tax: https://www.irs.gov/publications/p505
- IRS, Publication 509 (2026), Tax Calendars: https://www.irs.gov/publications/p509
- IRS, About Form 2210, Underpayment of Estimated Tax by Individuals: https://www.irs.gov/forms-pubs/about-form-2210
- IRS, S corporations: https://www.irs.gov/businesses/small-businesses-self-employed/s-corporations
Part of CORAA University · Tax and compliance for CPA firms: related guides, calculators and templates.
AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error