Estimated Tax Payments for California Business Owners: How to Calculate What You Owe

Key Takeaways

• Estimated tax is how you pay income tax throughout the year when no employer is withholding it for you.
• California's Franchise Tax Board (FTB) uses the same payment schedule as the IRS: 25% due each quarter on April 15, June 15, September 15, and January 15
• The IRS and the FTB expect you to pay tax as you earn income, not all at once in April.
• Federal estimated tax deadlines are April 15, June 15, September 15, and January 15
• We recommend either of the two methods for calculating what you owe: prior year safe harbor, current year projection, The prior year safe harbor is the lowest-risk option: pay 100% of last year's tax (or 110% if your adjusted gross income (AGI) exceeded $150K) and you avoid underpayment penalties regardless of what you actually owe this year
• Withholding from W-2 jobs or pension and retirement distributions counts toward your estimated tax obligation, which can reduce or eliminate your need for quarterly payments

What Are Estimated Tax Payments?

Estimated tax payments are tax payments you make during the year instead of waiting until you file your return in April.

They usually apply when tax is not being withheld automatically from your income. For California business owners, that often includes income from self-employment, consulting, partnerships, S corporations, investments, or rental activity.

Think of estimated payments as prepayments toward your final tax bill. When you file your return, those payments are credited against the total tax you owe. If you paid too much, you may get a refund. If you paid too little, you may owe a balance, and possibly an underpayment penalty.

The key point: estimated taxes are not a separate tax. They are a way of paying your regular income tax, self-employment tax, and other tax obligations throughout the year.

Quarterly Payments Are Required Whether You're Ready or Not

Most employees never think about estimated taxes. Their employer withholds throughout the year and the math just works. When you run a business, the math is your problem.

The IRS and the FTB expect you to pay tax as you earn income, either through withholding or estimated tax payments, not all at once in April. If you wait until filing to pay most of your tax, you may owe an underpayment penalty even if you pay the full balance by the April deadline. The penalty is mainly about whether enough tax was paid by each required installment date, not just whether the total was eventually paid. However, you can often avoid the penalty if you meet a safe‑harbor rule, owe only a small balance, qualify for an exception, or have enough withholding during the year.

This surprises a lot of business owners in year one. They set aside enough to cover the tax bill but not the penalty on top of it. The IRS and the FTB calculate underpayment penalties separately, and the combined cost can add up quickly if payments fall short in multiple quarters.

The Two Methods for Calculating What You Owe

There is no single required method. The IRS and FT B both allow two approaches, and the right one depends on how predictable your income is.

Prior Year Safe Harbor

This is the simplest and safest method. Take your total tax liability from last year's return and pay that same amount across the four quarters. If your AGI was over $150,000, you need to pay 110% of last year's tax instead of 100%.

The key benefit: if you hit the safe harbor threshold, you will not owe an underpayment penalty no matter what you actually owe at filing. You might still owe a balance at tax time, but you will not owe the penalty on top of it.

Example: Your 2024 total federal tax was $24,000 and your AGI was under $150K. Divide $24,000 by four. Pay $6,000 per quarter. Done. No matter what 2025 brings, you are penalty-safe on the federal side.

Current Year Projection

This method requires estimating your actual income for the current year and calculating 90% of the projected tax. If your income is lower this year than last, this method can reduce your quarterly payments.

The risk is accuracy. If you underestimate, you fall short of the 90% threshold and owe the underpayment penalty. For businesses with unpredictable revenue, this method carries real risk.

Best use case: your income dropped significantly from last year and paying 100% of last year's tax would be a cash flow burden.

When your business earned a lot last year but is now smaller or slower, using the prior‑year safe‑harbor method would force you to pay the same total tax again, even though your actual tax this year may be much lower. You can preserve cash by switching to the current‑year projection method, which bases your payments on your real‑world income and keeps you penalty‑safe while easing the strain on your business.

How Withholding Counts Toward Your Estimated Taxes

If you or your spouse also has W-2 income, pension distributions, or retirement withdrawals, the withholding from those sources counts toward your total tax obligation for the year, including self-employment tax.

This means you may be able to reduce or eliminate quarterly estimated payments by increasing withholding on your W-2 or retirement distributions instead. One practical move: increase your W-2 withholding by a set dollar amount each pay period to cover your business income tax liability.

Withholding is treated as paid evenly throughout the year for penalty calculation purposes, which gives it an advantage over lump-sum estimated payments made late in the year.

How to Set Up Your Quarterly Payments

1. Calculate your estimated tax using the prior year safe harbor (safest) or current year projection
2. Pay federal estimated taxes at IRS Direct Pay (directpay.irs.gov)
3. Pay California estimated taxes through FTB Web Pay at ftb.ca.gov
4. Mark all seven deadlines on your calendar now: four federal, three California. They are not always the same date.

One Missed Quarter Can Cost You on Both Returns

Federal and California underpayment penalties are calculated independently. Missing a quarter does not just generate one penalty. It generates two, one from the IRS and one from the FTB, assessed at different rates, for each quarter you were short.

The IRS computes the underpayment penalty by seeing how much you were short for each quarterly installment period (April, June, September, January), then applies a quarterly interest‑style rate to that shortfall for the time it was underpaid.

California’s FTB does the same thing: each missed or short installment is flagged, and the penalty is calculated on the underpaid amount for the period it was underpaid, using the FTB’s published quarterly rate.

This is why the prior year safe harbor matters. Once you hit that threshold on both returns, you are protected for the year. Any balance due at filing is just a balance, not a penalty situation.

If you are filing both federal and California returns and your income is variable, get your estimated payments right on both sides. The penalties are not catastrophic, but they are entirely avoidable.

Example: A Partnership That Got A $3,800 Penalty in April

Derek and Sarah run a two-partner bookkeeping firm in San Diego. The business had a strong year, $180,000 in combined net profit, split evenly at $90,000 each. Neither one made quarterly estimated payments. They assumed the accountant would sort it out at filing and that they could each write one check in April.

Derek skipped Q1. He skipped Q2. He skipped Q3. Sarah did the same.

April came. Each partner owed roughly $24,600 in federal and California taxes, $49,200 between them. They both had the money. But on top of the balance, each owed $1,900 in underpayment penalties, one from the IRS and one from the FTB, calculated separately for each quarter they had missed. Between the two of them: $3,800 in avoidable penalties.

They paid for it. But they did not have to.

The Core Mistake

You can pay the right amount at the wrong time - and incur thousands in penalties

What's Different in California

California has its own estimated tax system, administered by the FTB using Form 540-ES. The rules differ from federal in two important ways.

First, California requires a separate payment to the FTB. The payment dates are the same as federal, with 25% due each quarter on April 15, June 15, September 15, and January 15, but federal and California are two independent systems. Federal payments go to the IRS. California payments go to the FTB through FTB Web Pay using Form 540-ES. Making a federal payment does not satisfy your California obligation.

Second, California's underpayment penalty rate is set by the FTB each year and applied annually to the underpaid amount for each period it was short. For July 1, 2025 through June 30, 2026, the FTB's rate is 7% per year. Because the rate can change, check the FTB’s interest and estimate penalty rates before calculating a penalty.

Are You Paying the Right Amount Each Quarter?

Before you lower, skip, or delay a payment, run through these five checks:

1. Last year: What was your total tax liability, and does it help you qualify for a safe harbor?

2. California split: Did you pay the FTB separately from the IRS using Form 540-ES?

3. This year: Has your income changed enough to justify updating your projection?

4. Withholding: Do wages, retirement income, or other withholding already cover part of the tax?

5. Method: Are you calculating IRS and California payments separately instead of assuming they work the same way?

Talk to Us

Estimated tax payments are not just about paying enough. They are about paying enough at the right time. If your income is uneven, seasonal, or changing year to year, a quarterly projection can help you avoid overpaying early or getting hit with a penalty later.

If you are unsure which method makes sense for your income pattern, or if you want someone to run the numbers before Q2 payments are due, reach out to the team at NCO. We work with California business owners on exactly this kind of proactive tax planning.