Estimated tax, and the year the bill arrives twice

Here is the sequence that catches profitable businesses. Year one: you make money, you owe tax, but you were not required to pay in advance because you had no prior-year liability. Year two: in April you pay the whole of year one's bill and the first instalment of year two's. In June, another instalment. In September, another. In January, the fourth.

Five payments in ten months, covering roughly two years of tax. Nothing has gone wrong. This is the system working as designed, and it is the single most common cash-flow shock in a young profitable company.

Why the system works this way

Income tax is pay-as-you-go. An employee satisfies that through withholding on every paycheque. A founder taking profits from a company has nothing withholding on their behalf, so the law substitutes quarterly instalments — and it starts requiring them only once there is a track record to base them on. That one-year lag is the whole cause of the doubling.

The instalment dates

The safe harbours

You are not required to predict the year accurately. You are required to pay enough to land inside a safe harbour, and there are two. Pay the lower of them and the underpayment penalty does not apply, whatever the year turns out to be:

• 90% of the current year's tax, which requires a forecast you may not have.
• 100% of the prior year's tax — or 110% where prior-year adjusted gross income exceeded $150,000. This one requires no forecasting at all, because last year's number is already known.

For a growing business the prior-year harbour is almost always the right choice. You pay a known amount based on a smaller year, the shortfall settles at filing, and no penalty arises in between. In a year when income falls, the current-year test is the better one — you do not have to overpay because last year was good.

The uneven-income problem

Instalments assume income arrives evenly. Founder income rarely does — an agency with one large Q4 project, a business that closed a funding round in August, a founder who sold something in December. Paying four equal instalments on a year whose income all arrived at the end means overpaying for three quarters.

The remedy is the annualised income instalment method, which recomputes each instalment on income actually earned to that point. It requires a schedule with the return and is worth the preparer's time only when the unevenness is material. Below that threshold, the prior-year safe harbour is simpler and cheaper.

What people forget to include

1. 1Self-employment tax. For a US person with pass-through business income this is a large share of the total and is paid through the same instalments. Foreigners are outside it, but Americans abroad are not — the exclusion removes income tax and not this.
2. 2State estimated tax. Separate schedules, separate thresholds, separate penalties. A founder in a state with income tax has two instalment streams, not one.
3. 3The corporate layer. A C-corporation makes its own estimated payments on its own schedule, and its safe harbours are narrower than an individual's.
4. 4Distributions you have not taken. Pass-through income is taxed as the entity earns it, not when you take the cash out. A profitable year with everything reinvested still produces a personal bill.

The plan that makes this a non-event

1. 1Open a separate tax account at a different institution and move a fixed percentage of every receipt into it, on receipt. Not monthly, not quarterly — on receipt.
2. 2Set the percentage from last year's effective rate, federal plus state plus self-employment, rounded up. Revisit it once a year, not once a month.
3. 3Fund the double year deliberately. In your first profitable year, save for that year's bill *and* the first two instalments of the next. That is the entire fix, and it has to happen a year before the problem appears.
4. 4Use the prior-year safe harbour while you are growing. It removes forecasting from the exercise.
5. 5Put all five dates on the same calendar as the entity filings — April, June, September, January, and the return itself.

None of this reduces the tax. It converts an unpredictable event into a scheduled one, which is the only part of the problem you actually control. It also belongs in the same place as the rest of the calendar — this is the second-year cost nobody quotes at formation, alongside everything else in year two.