The third-quarter estimated tax payment went out on September 15. For a lot of owners, it was the largest check of the quarter, and it was calculated from a number set back in the spring based on last year’s results.
The January payment does not have to work the same way. Here is how to use the next fourteen weeks.
Estimates are a projection, not a bill
Quarterly estimates exist to prepay tax on income as you earn it. Most owners set them once, usually as a percentage of the prior year’s tax to meet the safe harbor rules, and then pay the same amount four times. That approach avoids penalties. It does not respond to the actual year.
If this year is running ahead of last year, the estimates are too low and April will bring a large true-up. If this year is running behind, the estimates are too high and you are lending the government money at zero interest. Either way, the number deserves a fresh look now that three quarters of results are in.
Step one: reproject the year
Take year-to-date income through August, add a realistic Q4, and run the projected tax. Compare it to what you have paid in estimates. That gap is your starting point. If you are ahead, the January payment can come down. If you are behind, you now know the size of the problem and have a quarter to shrink it.
Step two: decide what moves the number
With a projection in hand, the question becomes which decisions in the next fourteen weeks change the outcome. A few that come up repeatedly:
Retirement plan contributions. If a plan exists, the contribution level for the year may still be open. If no plan exists, some plan types can still be established for 2026, but the calendar is tightening.
Capital purchases. Equipment placed in service before December 31 qualifies for 100 percent bonus depreciation under the permanent rule for property acquired after January 19, 2025. Ordered is not the same as placed in service.
Compensation review. S corporation owners can adjust the salary and distribution mix for the balance of the year, within the reasonable compensation standard.
Income timing. For cash-basis businesses, when invoices go out and when collections land can shift income between years. This has to be done for real business reasons and within the rules, but it is a legitimate design choice.
Credits. If the business did qualifying research, hired from targeted groups, or made energy improvements this year, the credits may be substantial and the documentation is easier to assemble now than in March.
Step three: reset the January estimate
Once the decisions are made, recalculate. The fourth-quarter estimate for individuals is due January 15. It should reflect the year as it will actually land, not the spring’s guess. If you have been overpaying, the reduction is immediate cash flow. If you have been underpaying, a deliberate catch-up beats an April surprise.
The safe harbor question
Paying 100 percent of last year’s tax (110 percent for higher earners) through estimates and withholding generally avoids underpayment penalties regardless of what this year’s tax turns out to be. That is a floor, not a strategy. Owners who only manage to the safe harbor often overpay in strong years and under-plan in weak ones. The safe harbor tells you the minimum. The projection tells you the truth.
Where strategy comes in
Preparation calculates the estimate. Strategy asks whether the underlying number should be different. Most owners have the first and not the second. The fall is when the second one pays for itself, because there is still time to act on the answer. Specifics depend on your situation, and every move should be coordinated with your CPA.