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.
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. Example:
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 2018 are here.
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 (73000 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.
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. Using the same example:
$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 2019 tax year, estimated quarterly payments are due:
• April 15, 2019
• June 17, 2019
• September 15, 2019
• January 15, 2020
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.
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.