How to Calculate Estimated Taxes
There are three approaches to estimating your tax for they year:
- Use your prior year's tax return.
- Estimate your taxes from scratch.
- Use the safe harbor approach.
Use Your Prior Year's Tax Return
- If you expect your current year income and deductions to be about the same as your previous year, base your current year estimated taxes on your prior year return.
- Your prior year return must cover a full 12 months.
- Apply the current year tax rates to your prior year taxable income.
- Make sure you pay at least 90% of your expected annual tax liability to avoid an underpayment penalty.
- Example: If your annul estimated federal income tax liability plus your self-employment tax liability total $8,000, multiply $8,000 by 90%, which equals $7,200.
- The $7,200 is your required annual tax payment. At least this amount must be paid in order to avoid an underpayment penalty.
- Now, to figure your minimum quarterly estimated tax installment:
- Divide the $7,200 by 4, which equals a minimum quarterly installment of $1,800.
- You can remit the $1,800 using Form 1040-ES, Individual Estimated Tax Voucher.
- Each quarterly minimum installment stands on its own.
- This means, you must pay at least 25% of your annual liability each quarter.
- If you pay less than 25% each quarter, you will be subject to an underpayment penalty for the quarter that is short.
- Making up the short payment for one quarter in a future quarter does not eliminate the underpayment penalty for the quarter that was short.
For Freelancers and independent Contractors
- Organzie your financial data into one central accounting system on the cloud
- Software kept up to date.
- Your data kept secure
- Anytime, anywhere data access.
- Pay your quarterly estimated taxes online.
- Export Schedule C to TurboTax at year-end for faster filing.
- Save up to 50% off QuickBooks Self-Employed. Track every deduction! Start your free trial now!
Have an accounting or bookkeeping question? Email it to me.
- Return to the Business Taxes Table of Contents to find related links