California Estimated Tax Penalties: A Business Owner’s Guide

Introduction: Forgetting Your Estimated Payments Can Cost You — Big Time

If you're self-employed or run a small business in California, you're probably required to make estimated tax payments throughout the year. But what happens if you don’t?

You may be hit with California estimated tax penalties — and they add up fast.

In this guide, we’ll explain how estimated tax works in California, what penalties you face for underpayment or late payment, and how Orange County business owners can reduce or eliminate these charges.

📊 Who Has to Make Estimated Payments in California?

You’re required to make estimated tax payments if:

• You expect to owe $500 or more in state tax ($250 if married filing separately)
• You don’t have enough withholding to cover your total tax liability
• You’re self-employed, own a business, or receive 1099 income

Common situations:

• Sole proprietors
• S corporation shareholders
• Rental property owners
• Freelancers, gig workers, and consultants
• Anyone without W-2 withholding

👉 How to Get Back Into Compliance with the FTB

🧮 When Are Estimated Taxes Due?

California requires 4 estimated tax payments annually:

Missing or underpaying any of these may trigger a penalty.

⚠️ What Are the Penalties for Underpaying Estimated Taxes?

The Franchise Tax Board (FTB) charges:

• A penalty of 5% of the unpaid tax, plus
• 0.5% per month the payment is late
• Daily interest on unpaid amounts

There are two major penalty types:

✅ 1. Underpayment Penalty

Applies when you:

• Pay less than 90% of what you owe for the year
• Or don’t meet the safe harbor (100% of prior year’s tax liability)

✅ 2. Late Payment Penalty

Even if you make full payments later, you're penalized for missing the quarterly deadline.

💡 The FTB calculates interest based on the federal short-term rate + 3%, compounded daily.

🧾 Example: Estimated Tax Penalty Scenario

Let’s say:

• You owed $8,000 in total
• You only paid $3,000 by Q4
• You missed Q1 and Q2 completely

The FTB may assess:

• $400–$600 in penalties
• $150+ in interest
• Plus reduced eligibility for penalty relief

✅ How to Reduce or Eliminate Estimated Tax Penalties

✅ 1. Use the Safe Harbor Rule

Pay at least:

• 100% of last year’s total tax liability (110% if AGI > $150,000)
• Or 90% of this year’s projected liability

Even if you owe more at year-end, you may avoid penalties.

✅ 2. File FTB Form 5805

This allows you to:

• Request penalty calculation based on annualized income
• Show that income was uneven throughout the year (common for small businesses)
• Reduce penalties tied to Q1 or Q2 underpayment

✅ 3. Apply for a Penalty Waiver

You may qualify if:

• You experienced a natural disaster
• You had a serious illness or financial hardship
• You were a first-time filer or paid in good faith

👉 Can You Get California Tax Penalties Removed?

✅ 4. Set Up Estimated Payment Planning

Avoid future penalties by:

• Making quarterly payments through the FTB Web Pay portal
• Using Form 540-ES vouchers
• Working with a CPA to forecast your estimated liability

🔁 What If You’re Already in Collections?

If unpaid estimated taxes triggered a larger balance and you’re now in collections:

• You may qualify for an Installment Agreement
• You can request a Hardship Deferral
• Or submit an Offer in Compromise if you can’t pay

👉 FTB Offer in Compromise vs Installment Agreement

🧭 How Boulanger CPA Helps Orange County Business Owners

We help self-employed professionals, contractors, and small business owners across Anaheim, Irvine, Santa Ana, and Fullerton:

• Calculate and plan estimated tax payments
• File penalty abatement and Form 5805 requests
• Resolve outstanding balances and stop collections
• Submit Offers in Compromise if eligible

📞 Call 657-218-5700
🌐 www.orangecounty.cpa

Frequently Asked Questions

📣 About the Author

Marc Boulanger, CPA is the founder of Boulanger CPA and Consulting PC, based in Orange County, California.

With over a decade of experience helping individuals and businesses resolve serious IRS and State tax issues, Marc specializes in tax resolution strategies including Offers in Compromise, wage garnishment relief, and back tax compliance.

He is licensed as a Certified Public Accountant in both California and Oklahoma, and has a proven track record of helping clients settle complex tax debts and regain financial stability.

📍 Learn more at www.orangecounty.cpa or call (657) 218-5700.