Handbook / Estimated tax

State estimated taxes for the self-employed: how to check and pay

Most guidance on estimated taxes focuses on the IRS. But if you live in a state with an income tax, the state also expects to be paid during the year. Because nobody withholds tax from your self-employment income, that usually means a second set of quarterly payments. Missing them can lead to state penalties even if your federal payments are on time.

Does your state require them?

Start with two questions:

1. Does your state have an individual income tax? Not every state does.
2. Does it require estimated payments when tax is not withheld and you expect to owe more than a threshold?

The answers are on your state tax agency's website. The IRS maintains a list of state government websites that links to each state.

Some cities and counties also have local income taxes with their own payment rules.

How state rules can differ

State rules often resemble federal rules but are set independently. Check:

• thresholds for when estimated payments are required
• due dates, which may differ from federal dates
• safe harbor rules based on prior-year tax
• how payments are split across the year, which is not always in equal parts
• penalties and interest
• annualized income options for uneven income

Never assume a state follows the federal approach in every detail.

Estimating what you owe

State income tax is usually based on your federal income with state adjustments. A simple approach:

1. Estimate your business profit for the year.
2. Use last year's state return to see your effective state rate.
3. Apply it to expected income, adjusting for changes.
4. Divide by the number of payments your state requires.

Include state tax in the percentage you set aside from each payment; see how much to set aside.

Paying

Most state tax agencies offer:

• online payment from a bank account
• payment by card, often with a fee
• mailed vouchers with a check

Create an online account with your state agency. It usually shows payments made and lets you schedule future ones. Keep confirmation numbers with your records.

Federal and state together

Keep one calendar with both sets of due dates. The federal payments are covered in Form 1040-ES and paying estimated taxes online. Pay each separately: federal payments go to the IRS, state payments to the state.

Working in more than one state

If you live in one state and work in another, travel for work, or move during the year, you may have obligations in more than one state. Points to check:

• whether you must file in the state where the work was performed
• credits for taxes paid to another state
• reciprocity agreements between neighbouring states
• part-year resident rules if you moved

Where your clients are located and where you physically do the work can matter differently from state to state. A tax professional can help with multi-state situations.

Business entities

If you have an LLC taxed as a sole proprietorship, state estimated taxes are usually your personal obligation. Some states also have entity-level taxes or fees for LLCs and corporations, with their own due dates. Check your state's business tax pages.

First year tips

• Check your state's rules as soon as you start earning self-employment income.
• If you also have a job, you may be able to raise state withholding instead of, or as well as, making payments.
• If you have missed early payments, pay as soon as possible to reduce penalties.

Records to keep

• state estimated payment confirmations
• state tax returns
• any notices from the state
• calculations used for each payment

Questions to answer for your state

• Does my state require estimated payments, and above what amount?
• What are this year's due dates?
• Is there a prior-year safe harbor, and what does it require?
• Can I pay online, and do I need an account?
• Are there local income taxes where I live or work?
• What penalty applies if I pay late?

Write the answers in your tax folder and check them again at the start of each year.

Keep the state in your set-aside

When you set aside part of each payment for taxes, include the state amount. Some people keep state money in the same tax account as federal money; others use a separate account so both are clearly covered.

If your state has an income tax, plan for state estimated payments as well as federal ones: check your state's thresholds, due dates and safe harbors, set aside money from every payment, and pay the state separately.