Estimated Taxes in the Year You Sell Your Business

In the year you sell your business, paying 110% of last year's tax on time generally avoids the penalty if last year's AGI topped $150,000.

Estimated taxes in the year you sell your business are a timing problem more than a tax problem. The gain may be the largest income you will ever report, and the IRS expects tax on it to come in during the year, not all at once the following April. Miss the schedule and an underpayment penalty runs on each late installment. The good news is that the rules give sellers three clean ways to stay on schedule, and the right one depends on when the deal closes and how you are paid.

Why is the year you sell your business different?

An owner's withholding and estimated payments are usually sized to a normal year's income. A sale breaks that pattern. A sale can produce capital gain and ordinary income at once, with much of the tax concentrated in the closing year, and the 3.8% net investment income tax may apply too. A qualifying installment sale can spread some of the gain into later years. Either way, your usual withholding and estimated payments may not cover the additional tax.

The penalty is not a flat fine. It works like interest, charged on each installment for the time it was late, at the IRS underpayment rate. That makes it a cost you can plan around rather than a surprise, as long as someone plans for it before closing instead of after.

The safe harbor protects you from the penalty, not from the tax. Set the cash aside for the balance the day the money arrives.

Estimated tax

Tax payments you make during the year when withholding does not cover enough of your tax, including tax on a business sale.

Required installment

The amount due on each of the four estimated tax due dates.

Safe harbor

A payment level that avoids the underpayment penalty even if you owe more when you file.

Annualized income installment method

A way to size each installment to your income for set periods of the year instead of assuming it came in evenly, reported on Form 2210, Schedule AI.

How do you avoid the underpayment penalty in the year of a sale?

The required annual payment is generally the smaller of two amounts: 90% of the tax on this year's return, or 100% of the tax on last year's return. If last year's adjusted gross income was more than $150,000 ($75,000 if you are married filing separately this year), the prior-year figure becomes 110%. You can use the prior-year amount only if you filed a return for a full 12-month tax year. Each installment is a quarter of that amount, due April 15, June 15, September 15, and January 15 of the following year.

Sellers usually use one of three approaches, sometimes together.

1. Pay on last year's tax

If you qualify for the prior-year safe harbor and cover 110% of last year's tax (100% if last year's adjusted gross income was at or below the threshold above) in four equal, on-time installments, counting withholding, you generally avoid the federal underpayment penalty, however large this year's gain turns out to be. This is the simplest option and it does not depend on predicting the sale price, the closing date, or the final tax.

The trade-off is the bill in April. Every dollar of tax above the safe harbor is still due by the April payment deadline, even if you get an extension to file the return. Owners who use this approach should move the expected balance into a separate account at closing so it is not spent or invested in something they cannot sell quickly.

2. Size the payments to when the income arrived

Equal quarterly payments assume income came in evenly. A sale that closes in November did not. The annualized income installment method measures your income for periods ending March 31, May 31, August 31, and December 31, so earlier installments can stay small when the gain comes later. For a gain recognized in November 2026, the large payment generally falls on the installment due January 15, 2027. Your CPA can calculate the annualized payments before each deadline, then complete Form 2210, Schedule AI, with your return.

This method suits a late-year closing where you would rather not prepay tax on a deal that has not happened yet. It takes more work and careful records of when income arrived.

3. Use withholding late in the year

Withholding gets a special rule. Unless you elect to use the actual dates, tax withheld during the year is treated as if an equal part was paid on each installment due date. Extra withholding in December can therefore cover a shortfall from earlier quarters in a way a December estimated payment cannot. An owner still on payroll can raise withholding on final paychecks. Your CPA should confirm the approach before you rely on it.

What else changes the estimate?

A few details move the numbers your CPA works with.

• Installment sales. In a qualifying installment sale, eligible gain is generally reported as payments are received. Depreciation recapture and gain on inventory generally must be reported in the year of sale even if the buyer pays later, so they belong in that year's estimates.
• The 3.8% net investment income tax. It is part of the tax your estimates have to cover, along with regular income tax.
• State estimated taxes. States that tax income have their own estimated tax rules and safe harbors. Check them separately.
• An early return. If you file your return and pay the full balance by January 31, the law waives any penalty on the fourth installment.
• Small balances. No penalty applies if the tax on your return, after withholding, is under $1,000.

The IRS can also waive the penalty in limited cases, including for someone who retired after age 62 during the year or the year before, when the underpayment had reasonable cause and was not willful neglect. A waiver is a request, not a plan.

Who should handle this, and when?

Start before closing. Your CPA should estimate the year's tax under each approach, your attorney should know when and how sale proceeds and any holdback or earnout will be paid, and the cash for the tax should be set aside the day the proceeds arrive. For the bigger tax decisions around a sale, see our pre-exit tax checklist, and for how the professionals should split the work after a liquidity event, see how to coordinate your CPA, advisor, and attorney. If any of the gain may be excluded as qualified small business stock, that changes the estimate too; see our guide to the QSBS exclusion.

Anchor provides tax strategy and coordination, not tax preparation. Your CPA calculates the estimated payments, and you agree on who submits them. We work with your CPA to line up the plan for your proceeds with your tax payment schedule.