Quarterly Estimated Tax: Why You Skip Year One, but Year Two Is Mandatory

The Pay-As-You-Go Principle

The US tax system runs on a pay-as-you-go principle — tax is paid as income is earned. If you're a W-2 employee, your employer withholds tax from each paycheck and sends it to the IRS. You never see that money — it's deducted before deposit.

But if you own an LLC or C-Corporation, freelance, invest, or earn from multiple sources — nobody withholds tax for you. So you have to pay it four times a year, on the IRS-set dates, before filing the annual return.

The 2026 schedule:

Year One: Why You Usually Don't Need to Pay

The IRS gives several ways to avoid the underpayment penalty under a rule called safe harbor. One of them: pay at least 100% of your prior-year tax (110% if AGI > $150,000) by year-end. The test runs automatically.

In year one of a business, there is no prior year. 100% of zero is zero. The requirement is satisfied by default, and no underpayment penalty will be assessed — even if you make no quarterly payments at all during the year.

This doesn't mean the tax goes away. You still file an annual return next April and pay the full first-year tax at that time. It only means the IRS won't punish you for not paying it in quarterly installments during the year itself.

One nuance: the "100% prior year" safe harbor works cleanly only when the prior year filed a return covering a full 12-month tax year. If your first year was a partial year (the company opened in October, say), the rule still applies — but the details are worth confirming with a CPA, because they vary by entity type and income source.

Year Two Flips the Logic

From year two onward, the logic reverses. If year one had a tax bill — any positive number on the return — the IRS now expects you to pay it in quarterly installments during the current year. That's the "obligation" part. It is not optional.

If quarterly payments aren't made, the IRS will assess an underpayment penalty automatically at year-end. The penalty rate is the federal short-term rate plus three percentage points; for Q2 2026 it is 6% annualized (Rev. Rul. 2026-5). It's not catastrophic money, but the charge is automatic: no warnings, no notices. A "penalty" line simply appears on next year's return and gets added to what you owe.

Important nuance: the penalty applies even if you end up with a refund. You can overpay for the year and still get a penalty for not paying in quarterly installments during the year.

In our practice, most LLC owners first think about estimated tax not during the year — but in April, when the CPA asks about quarterly payments for the year just past. By that moment the underpayment penalty has already been assessed. This is a decision made ahead of time, in December or January — not in retrospect. — Anton Chekhov, founder and CEO of Edeal

Who This Actually Applies To

Quarterly payments are required if you expect to owe more than $1,000 to the IRS at year-end. In practice that's almost any LLC owner with real income after the first year of operations.

Single-member LLCs are by default disregarded for tax purposes: the income is the owner's personal income. In addition to federal income tax, a US-resident owner pays self-employment tax — 15.3% (Social Security + Medicare). The 2026 Social Security wage base is $184,500; above that, the 12.4% SS portion stops and only the 2.9% Medicare portion continues (with no cap).

Multi-member LLCs are taxed as partnerships by default: each partner receives a Schedule K-1 and pays tax on their share through estimated tax.

C-Corporations pay corporate tax themselves — 21% federal plus state. Corporate estimated tax goes on Form 1120-W; the mechanics mirror those for individuals, but the forms and thresholds differ.

Non-residents with US LLCs. If you're not a US citizen and don't live in the US, your foreign-owned LLC may fall under specific rules depending on how income is structured. This is where a CPA matters: the same inflow can be Effectively Connected Income (ECI) and taxed on the resident's schedule, or FDAP with fixed withholding at source. The estimated-tax obligation appears or doesn't appear accordingly. There is no universal answer — only a correct calculation for your specific structure.

How We Handle This at Edeal

Estimated tax is the kind of task where doing it yourself rarely helps and often goes wrong. Too many situational parameters: entity type (SMLLC / LLC partnership / C-Corp / S-Corp), owner's residency status, source of income, withholding at source, treaty between the US and the owner's country, ECI vs FDAP, the mix of state obligations. There's no universal formula.

That's why we don't teach Edeal clients to calculate estimated tax themselves. It's part of ongoing bookkeeping: Edeal's CPA calculates the quarterly amount, prepares the payment documents, and submits them on time. Clients get a reminder before each deadline and confirmation after payment. If the picture changes during the year — revenue grows, new income streams appear, the structure shifts — the calculation is updated and the next quarter goes out with the correct number.

That eliminates three typical problems at once: a missed deadline, an underpayment with automatic penalty, and an overpayment that locks up working capital until next year's refund.

What to Check Before June 15

If your company is past year one and had a tax bill last year, before June 15 it's worth confirming with a CPA:

• the total tax liability for the prior year (this is the base for the "100% prior year" safe harbor);
• whether the 110% rule applies (relevant if your prior-year AGI exceeded $150,000);
• whether withholding at source has already partially satisfied the requirement;
• whether the entity type or residency status has changed — that changes the calculation;
• whether there's enough time before the deadline for the payment to be recorded on time (not retroactively).

If your company is in year one — the practical recommendation is different. This year, the underpayment penalty isn't a risk. But by year-end, you should know what the total first-year tax liability will be: that number becomes the base for year-two estimated tax. If that figure isn't calculated, next April will be an unpleasant surprise.

What Happens If You Just Ignore It

The IRS doesn't send estimated-tax reminders. It doesn't write to say a deadline is approaching. It doesn't notify you when a penalty is assessed. Everything is automatic: deadline passes — obligation unmet — penalty assessed — interest accrues.

When you file the annual return next April, a line "penalty for underpayment of estimated tax" (or a Form 2210 calculation) appears on it. That amount is added to what you owe. Disputing the assessment generally isn't possible — because it isn't an IRS error, it's the correct application of the rule.

The only scenario where disputing makes sense is when your specific case falls under an exception (for example, the underpayment was caused by a documented disability or other reasonable cause). That's a separate process — Form 843 or an attachment to Form 2210. For most typical situations, it's far cheaper to prevent the penalty than to try to undo it.