The real trade
If most of your income comes from a business you own, nobody withholds tax from your pay. So four times a year, you decide: send the IRS an estimated payment, or hold the cash and accept an underpayment penalty when you file.
They buy different things. Paying as you go buys peace of mind. Holding the cash buys flexibility, and the penalty is the price.
This isn't about beating the IRS. It's about cash, comfort, and how you behave with money sitting in the account. Here are the rules in plain English, five things to weigh, and how I made the call.
The rules, in plain English
From IRS.gov, checked November 2, 2026:
Who: individuals, including sole proprietors, partners and S corporation shareholders, generally make estimated payments if they expect to owe $1,000 or more when they file.
When: four due dates. April 15, June 15, September 15, and January 15 of the next year. For most individuals, the next one is January 15, 2027, for income from September through December 2026.
The usual way to avoid the penalty: pay in at least 90% of this year's tax, or 100% of last year's, whichever is smaller. If last year's adjusted gross income was over $150,000 ($75,000 if married filing separately), 110% replaces 100%.
How the penalty works: it's figured on the amount you were short, how long you were short, and the IRS underpayment rate. That rate is 7% a year for October through December 2026, and the IRS resets it every three months.
Your tax preparer sets the right number for you. Special rules apply to farmers, fishers and some higher-income taxpayers, and uneven income has its own method (more below).
Sources: IRS: Estimated taxes · IRS: Due dates · IRS: Underpayment penalty · IRS: Interest rates for late 2026
Five things to weigh
1. What would the cash actually do?
Say you hold back $40,000 you'd otherwise send in, for about three months (hypothetical, round numbers). If the 7% annual rate the IRS set for late 2026 held, that's roughly $700. It's simple math for illustration. The IRS compounds daily and resets the rate, so the real figure will differ.
If that $40,000 sits idle in checking, you paid about $700 for flexibility you didn't use. If it covers a real need, like a slow month or an order you have to fund, the flexibility had a job. Either way, there's no prize for holding it.
2. Will the tax money still be there?
This is the behavior question, and it's the big one. Cash in the operating account gets spent. Not on purpose. It just looks available.
Picture an owner (hypothetical) who holds the estimate, has a good fall, and buys equipment in December. April arrives with the tax bill, the penalty, and no cash set aside. If you hold, hold it somewhere you won't touch it. If you can't trust that, paying as you go is the simpler path.
3. How even is your income?
The IRS lets people with uneven income figure the penalty on an annualized basis, using Schedule AI on Form 2210, which can lower or remove it.
Take a business (hypothetical) that earns most of its profit late in the year. It may have smaller required payments early on than an even four-way split suggests.
4. What's your backstop?
If the bill comes in bigger than planned, where does the money come from?
Example: at Vala Secure, we kept roughly two months of operating expenses as a floor, and we had a line of credit that acted like an insurance policy. It was still debt, and we rarely drew on it. Before the line, there were times I had to put my own money into the business. After it, I never had to again.
A reserve and a backstop make either choice calmer. Without them, the owner's personal account becomes the backstop.
5. What helps you sleep?
Some people like the security of paying quarterly and feeling good that it's taken care of. That's a fine reason. It's a real benefit, even if it never shows up on a statement.
Think about two owners (hypothetical) with the same income and the same cash. One pays every season and never thinks about April. The other holds the cash and accepts the penalty. Both can be reasonable. The wrong answer is the one you didn't choose on purpose.
How I made the call
I've made this call at different times and in different ways across my businesses.
At Vala Secure, quarterly payments felt like paying the government early with money I wanted to keep working in the business. It wasn't free. We chose to pay the penalty and interest for not paying quarterly. That choice sat alongside the reserve and the line of credit above.
At Skyrise, we pay quarterly estimates right now. I like the peace of mind of knowing all the bills are accounted for. That may change later.
Jenny's business has done it both ways, depending on its cash needs at the time. It had no line of credit to lean on.
That's how we thought about it. It's not a requirement or a suggestion for anyone else.
Everybody's situation is unique to them. Do what makes you feel the most secure.
Questions for your tax preparer
What's my safe harbor amount for 2026, in dollars, and how much have I paid in so far?
If I hold some or all of the January 15 payment, roughly what would the penalty be?
Does the annualized method fit how my income came in this year?
Tax strategy is part of the plan. I lay out the choices and tradeoffs, you decide, and your tax preparer carries it out and files.
One next step
If you want the tax choice, the reserve, and the rest of your financial world on one page, Book a Fit Call.