Corporate estimated tax: four installments a year
Four installments a year once the tax reaches $500, each a quarter of the required annual payment, worked for Northwind's first full year.
A corporation doesn't wait for April to pay its income tax. Once it expects $500 or more for the year, it pays estimated tax in four installments, on the 15th day of the 4th, 6th, 9th and 12th months of its tax year — April, June, September and December for a calendar year — each a quarter of the required annual payment, through EFTPS. A date that lands on a weekend or holiday moves to the next business day.
The required annual payment
Each installment is 25% of the required annual payment: the lesser of 100% of this year's tax and 100% of last year's. Last year only counts if it was a full 12-month year and its return showed a tax liability, and never for a large corporation (one with $1 million of taxable income in any of the three years before). A company in its first profitable year usually can't use it.
100% of last year's tax
- Good at
- Known in advance — no forecasting.
- Pay it and there's no underpayment penalty, however this year turns out.
- Watch for
Not available after a short year, a zero-tax year, or to a large corporation.
- Best for
- A company whose tax is rising and whose last year was a full year with a liability.
100% of this year's tax
- Good at
- Always available.
- Matches the tax the year actually owes.
- Watch for
Needs a forecast of this year's taxable income, revised as the year goes.
- Best for
- Everyone else, including every company's first profitable year.
Federal estimated tax, installment 1 of 4 for 2027
| Account | Debit | Credit |
|---|---|---|
| Prepaid income taxes | 1,100.86 | |
| 1000Cash — operating | 1,100.86 | |
| Balanced | 1,100.86 | 1,100.86 |
Each installment is a prepayment of the year's tax.
Federal income tax for 2027, against the four installments
| Account | Debit | Credit |
|---|---|---|
| Income tax expense | 4,403.45 | |
| Prepaid income taxes | 4,403.45 | |
| Balanced | 4,403.45 | 4,403.45 |
At year end the year's tax is booked against what was prepaid; any shortfall is still payable.
Wrong
File Form 1120-W with the IRS each quarter.
Right
Work the installments from Pub. 542's worksheet, pay through EFTPS, and use Form 2220 if one was late or short.
Form 1120-W, the estimated tax worksheet, is historical: its 2022 revision was its last. Publication 542 has the worksheet now, and Form 2220 figures any underpayment penalty.
Expect $500 or more of tax, and the tax is paid in four quarters during the year, not in April after it.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Anything marked as a convention is ours, not the rule-maker's.
- Federal statute
- 26 U.S.C. §6655(c)–(f) (opens in a new tab)Failure by corporation to pay estimated income tax — installments, the required annual payment, the $500 exceptionFree to read
- 26 U.S.C. §7503 (opens in a new tab)Time for performance of acts where last day falls on Saturday, Sunday, or legal holidayFree to read
- IRS guidance
- IRS Pub. 542 (Rev. 01/2024), Estimated Tax (opens in a new tab)Corporations — estimated tax, EFTPS, Form 2220, and Form 1120-W now historicalFree to read
- Official form
- Form 2220 (opens in a new tab)Underpayment of Estimated Tax by Corporations (PDF)PDF · Free to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- Corporate estimated taxThe four installments a corporation pays toward the current year's income tax when it expects $500 or more — on the 15th day of the 4th, 6th, 9th and 12th months of its tax year, each 25% of the required annual payment, through EFTPS. Underpayment is figured on Form 2220; Form 1120-W is historical
- Income tax expenseThe P&L charge for income taxes — current tax payable for the period plus the change in deferred tax assets and liabilities
- Prepaid expenseCash paid before the benefit is consumed — an asset until it is. "Prepayment" is the UK and IFRS word for the same asset; a customer paying us early is a customer advance or deposit, a liability
In the founder glossary
This lesson’s ideas, explained for the founder running the company. Each has an entry in the founder glossary.
See also
- Startup tax deadlines by month for a C-corpFederal tax deadlines for a calendar-year C-corp, month by month: W-2s, 1099s, Form 941, Form 1120, estimated taxes and Delaware franchise tax.
- First-year compliance calendar for a Delaware C-corpDelaware franchise tax, 1099s, the federal return, payroll filings, state annual reports and sales tax: the deadlines a young C-corp misses most, by month.
- Form 1120The federal income tax return for a C corporation. It's due on the 15th day of the fourth month after year end, so April 15 for a calendar-year company; Form 7004 extends the filing, not the payment, by six months.
- ComplianceCalendarFiling deadlines by jurisdiction, with the owner and the date penalties start.