Quick Answer
Tax instalments are periodic prepayments of income tax throughout the year, required when your prior-year tax owing exceeds a threshold. In Canada, individuals and corporations must pay instalments if their net tax owing exceeds $3,000 ($1,800 for Quebec residents) in either of the two previous years. In the US, corporations generally must pay estimated tax if they expect to owe $500 or more at filing. Missing or underpaying instalments triggers interest charges and potentially penalties, even if you pay the full balance by the filing deadline.
What Are Tax Instalments?
Tax instalments are advance payments toward your expected income tax liability for the current year. Rather than paying your entire tax bill as a lump sum on the filing date, the tax authority requires you to remit periodic payments during the year. This pay-as-you-go system ensures governments receive a steady flow of revenue and prevents taxpayers from facing a large, unexpected bill at year-end.
Tax instalments apply to:
- Self-employed individuals who do not have enough tax withheld at source to cover their liability
- Corporations that expect to owe tax above the instalment threshold
- Individuals with significant investment income (dividends, capital gains, rental income) where source withholding is insufficient
If you are also dealing with payroll obligations, see our payroll compliance guide for small business for a comprehensive overview of withholding requirements.
Canadian Tax Instalments for Individuals
When Are Instalments Required?
The Canada Revenue Agency (CRA) requires individuals to pay tax instalments if their net tax owing exceeds $3,000 in both the current year and at least one of the two preceding years. For Quebec residents, the threshold is $1,800 for federal instalments (since Quebec collects its own provincial income tax). Net tax owing includes federal and provincial tax minus deductions for income tax withheld at source.
Instalment Due Dates
Individual instalment due dates follow a quarterly schedule:
| Instalment | Due Date | Period Covered |
|---|---|---|
| 1st payment | March 15 | January – March |
| 2nd payment | June 15 | April – June |
| 3rd payment | September 15 | July – September |
| 4th payment | December 15 | October – December |
When a due date falls on a weekend or holiday, the CRA considers the payment on time if received on the next business day. For more on managing your tax deadlines, see our tax compliance calendar guide.
Three Methods to Calculate Instalments
The CRA allows three calculation methods, and you can choose whichever results in the lowest payment:
- No-calculation option — Pay the amount shown on the CRA's instalment reminder (Form INNS1). This is based on your most recent assessed return and is the simplest approach.
- Prior-year option — Calculate instalments based on your prior-year net tax owing. If your income is declining, this method often produces lower payments.
- Current-year option — Estimate your current-year net tax owing and pay one-quarter of that estimate each quarter. This method is best if your income has dropped significantly, but you must make a reasonable estimate — lowballing can still trigger interest.
Regardless of which method you choose, you must pay enough total tax by December 31 to avoid instalment interest. Any remaining balance is due with your return on April 30.
Canadian Corporate Tax Instalments
Canadian corporations must pay monthly instalments if their total tax payable for the year exceeds $3,000. The calculation is generally based on the prior year's tax payable, divided into 12 equal monthly payments due on the last day of each month.
For new corporations with no prior-year tax history, instalments begin in the third month of operation. The first two months are payment-free, but the full year's liability must still be settled by the corporate filing deadline (typically two months after year-end, or three months with a valid filing extension).
For related topics on corporate tax rates, see our guide on Canadian corporate tax rates.
US Estimated Tax for Small Businesses
Corporate Estimated Tax Requirements
In the United States, corporations (including C corporations) must pay estimated tax if they expect to owe at least $500 in tax for the year. The payments are made quarterly:
| Payment | Due Date | Income Period Covered |
|---|---|---|
| 1st quarter | April 15 | January 1 – March 31 |
| 2nd quarter | June 15 | April 1 – May 31 |
| 3rd quarter | September 15 | June 1 – August 31 |
| 4th quarter | December 15 | September 1 – December 31 |
Each payment should equal at least 25% of the required annual payment. For more details on the mechanics, see our estimated tax payments guide.
Sole Proprietorships and Self-Employed
Sole proprietors, freelancers, and partners must pay estimated tax on their self-employment income if they expect to owe $1,000 or more in tax beyond what is covered by withholding. This includes both income tax and self-employment tax (Social Security and Medicare). The quarterly due dates mirror the corporate schedule above. Our quarterly estimated tax payments guide for small business provides step-by-step calculation instructions.
Safe Harbor Rules
The IRS provides safe harbor rules that protect you from underpayment penalties if you meet one of these thresholds:
- 100% of prior-year tax — If your adjusted gross income (AGI) was $150,000 or less, paying 100% of your prior-year tax liability through withholding and estimated payments eliminates the penalty.
- 110% of prior-year tax — If your AGI exceeded $150,000, you must pay 110% of the prior year's tax to qualify for the safe harbor.
- 90% of current-year tax — Paying at least 90% of the current year's actual tax liability also avoids the penalty.
Using the prior-year safe harbor is often the safest strategy because it provides a known target, while the 90% rule requires accurately estimating current-year income.
Penalties and Interest for Late or Insufficient Instalments
Canada: Instalment Interest and Penalties
The CRA charges instalment interest on each missed or underpaid instalment from the due date to the date of payment. The rate is the prescribed interest rate (which changes quarterly) plus 4 percentage points. If instalment interest exceeds $1,000, a penalty applies: 50% of the interest amount minus $1,000. This is known as the instalment penalty under the Income Tax Act.
US: Underpayment Penalty
The IRS imposes an underpayment penalty under Section 6654, calculated as interest on the underpaid amount from the due date of each instalment to the date of payment or the filing deadline, whichever is earlier. The penalty rate equals the federal short-term rate plus 3 percentage points, compounded daily. There is no penalty if the underpayment is less than $1,000, or if you qualify for a safe harbor.
Strategies to Minimize Instalment Costs
- Use the prior-year method when income is falling — If you earned less this year than last, the prior-year calculation produces lower instalments.
- Increase source withholding — In Canada, tax withheld at source (from salary or pension income) is treated as paid evenly throughout the year, even if withheld in December. Increasing withholding can retroactively cover missed instalments without interest.
- Make early payments — Paying instalments before the due date reduces interest charges on any shortfall.
- Track deductible expenses carefully — Maximizing legitimate tax deductions for small business lowers your net tax owing, which in turn reduces future instalment requirements.
- Set up reminders and automated payments — Late instalments are entirely avoidable with proper planning. Calendar reminders and pre-authorized debit arrangements ensure payments arrive on time.
Recording Tax Instalments in Your Books
Each instalment payment is recorded as a reduction of your tax liability, not as an expense. The expense is recognized when you file your return and calculate the actual tax owing.
Journal Entry for Instalment Payment
Dr. Income Tax Payable $X
Cr. Cash $X
At year-end, when the actual tax expense is calculated, you debit Income Tax Expense and credit Income Tax Payable for the total liability. The instalments already recorded reduce the balance in Income Tax Payable, leaving only the net amount still owed (or a refund receivable if you overpaid).
Summary
Tax instalments are a pay-as-you-go requirement for small businesses and self-employed individuals whose tax owing exceeds the relevant threshold. In Canada, the $3,000 net-tax-owing threshold triggers quarterly individual instalments and monthly corporate instalments. In the US, the $500 corporate threshold and $1,000 individual threshold require quarterly estimated payments. Missing instalments results in non-deductible interest and potential penalties, so planning ahead with accurate estimates, safe harbor strategies, and proper bookkeeping entries is essential for keeping your tax costs under control.
