Self-Employed? Calculate Your Quarterly Estimated Income Tax
Authors Note: This has been updated on Nov 10, 2021 with updated information, links, and resources.
If you’re an independent contractor, sole proprietorship, partnership or S-corporation, you’re probably required to pay your income tax in four installments throughout the year.
Why? Because you have no employer taking that tax out of every paycheck and sending it to the U.S. Treasury. Yet the government still needs your tax money coming in to cover its ongoing operating expenses. Thus, we have a quarterly estimated tax.
There are a few exceptions to the requirement to pay estimated taxes:
- You expect to owe less than $1,000 income tax
- Businesses filing as a corporation who expect to owe less than $500 income tax
- You did not owe any taxes for the previous tax year and did not have to file a tax return
Why “estimated”? Because you’re paying tax on this year’s earnings before they’ve even happened.
Next April when you do your annual tax return, you’ll have your real income amount and taxes owed for the year. The quarterly taxes you already paid will be compared to the actual amount owed, and any difference will be resolved by either a refund to you or an additional payment from you.
How to do the calculation for estimated quarterly taxes:
1. Estimate your adjusted gross income, taxable income, deductions, and credits.
The easiest way to do this is to use the previous year’s figures. This method works best for those whose income stays relatively constant year to year. Simply divide your tax liability for the previous year by 4 to determine what you owe for each quarter.
For instance, if you paid $12,000 in taxes last year, you can pay $3,000 in quarterly taxes this year ($3,000 x 4 quarters).
However, if your income varies, you might consider making payments based on quarterly earnings. In other words, at the end of each quarter, you’ll annualize your earnings and pay an estimate based on this figure.
This method is slightly more complex and will require more math, but it can be helpful for individuals who have fluctuating income or changing deductions.
2. Calculate income tax.
For this, you’ll need to find out your tax rate (based on your income), as listed in the IRS’s tax brackets. They change every year, so be sure you’re looking at the current rates. The tax brackets for 2021 are here:
|Rate||For Single Individuals||For Married Individuals Filing Joint Returns||For Heads of Households|
|10%||Up to $9,950||Up to $19,900||Up to $14,200|
|12%||$9,951 to $40,525||$19,901 to $81,050||$14,201 to $54,200|
|22%||$40,526 to $86,375||$81,051 to $172,750||$54,201 to $86,350|
|24%||$86,376 to $164,925||$172,751 to $329,850||$86,351 to $164,900|
|32%||$164,926 to $209,425||$329,851 to $418,850||$164,901 to $209,400|
|35%||$209,426 to $523,600||$418,851 to $628,300||$209,401 to $523,600|
|37%||$523,601 or more||$628,301 or more||$523,601 or more|
Using the $73,000 taxable income from the example in step 1, it would be subject to a 22% tax rate. That works out to $16,060 tax owed (73,000 x .22 = 16060).
3. Calculate the self-employment tax.
This is a combination of the Social Security and Medicare taxes that would normally be taken out of your paycheck if you were working as an employee. If you earned more than $400 in the year, you are required to pay this tax.
The self-employment tax rate is 15.3% of your net income (12.4% Social Security tax; 2.9% Medicare tax). You might also be subject to an additional 0.9% if your net earnings from self-employment exceed $200,000 (or $250,000 if filing jointly).
Keep in mind that self-employment tax is not the same as income tax. However, like income taxes, you might consider making quarterly estimated payments rather than waiting for your annual tax return in order to eliminate any penalties for late payment.
You can calculate your self-employment tax as follows:
Step A. Calculate your self-employment taxable income by multiplying the estimated gross income by 92.35%. For example:
$100,000 Estimated gross income
= $92,350 Self-employment taxable income
Step B. Calculate the tax by multiplying self-employment taxable income by 15.3%. For example:
$92,350 Self-employment taxable income
= $14,129 Self-employment tax
4. Add income tax and self-employment tax.
That’s the total amount of estimated tax you owe for the year. You’ll calculate each of these liabilities based on the methods we’ve shown you above, then simply add them together.
You might be wondering what to do about tax deductions at this point. Unfortunately, the IRS does not permit you to make any deductions on your quarterly tax estimates. Instead, you can expect to make these deductions once you file your annual taxes.
Assuming your estimated payments were accurate, this can potentially mean that you’ll stand to receive a tax refund, depending on the nature of these deductions, so always hang onto your documentation.
Your total estimated tax can be calculated using the same data from the example above:
$16,060 Estimated income tax
+ $14,129 Estimated self-employment tax
= $30,189 Total tax
5. Calculate your quarterly payment.
Divide the estimated total tax by 4. In our example, $30,189 / 4 = $7,547. That’s the amount of the check the individual in this example will write (or pay online) to the U.S. Treasury each quarter.
For the 2021 tax year, estimated quarterly payments are due:
- April 15, 2021
- June 15, 2021
- September 15, 2021
- January 18, 2022
There are a few other specific situations to be aware of in order to avoid penalties. For example, you must pay at least 90% of what you owe; and if your income is more than $150,000 per year, then you must pay 110% of last year’s tax.
Additionally, you may be assessed a penalty if you make uneven payments throughout the year. The IRS recommends that taxpayers annualize their income and make equal payments to avoid or at least reduce this penalty.
The IRS can make an exception and waive this penalty if you can demonstrate that you were unable to make these payments due to extenuating circumstances (e.g., a car accident or natural disaster).
The IRS also has specific rules for farmers, fishermen, and certain high-income taxpayers. These situations are covered in IRS Publication 505, which explains how these specific professions are impacted by rules governing the self-employed.
If you have any questions about your estimated quarterly tax or any income tax questions, please feel free to contact your Xendoo tax professional. It’s all part of our service, which sets your mind at rest so you can stay focused on growing your business.