It can feel overwhelming to calculate and pay your estimated quarterly taxes, we totally get it. This post will help breakdown the big takeaways and also provides instructions on how to actually make the payments.
If you earn income throughout the year and no one is withholding tax from your pay (self-employment income, investment income, rental property income), or you tend to always have too little tax withheld from your paycheck during the year, you might need to be sending in estimated taxes. If you will owe $1,000 or more when you file, the IRS wants you to calculate and pay your estimated payments quarterly.
Estimated Tax Basics
- If you have any self-employment income, it’s a good rule of thumb to save 30-35% of your net income (income after expenses) throughout the year towards your taxes. Use a savings account that you designate as your “tax savings” account where the money will stay separate and earn some interest!
- If you are going to owe at least $1,000 at the end of the year, you should be sending in estimated payments to avoid any penalties.
- The minimum you’ll need to send in to avoid penalties is the lower of:
- 100% of the tax you paid last year (substitute 110% if your AGI is above the threshold) or,
- 90% of this year’s taxes (this is a more difficult figure to calculate because we don’t have a crystal ball lol)
How to Calculate Your Estimated Taxes
An Easy DIY
- If your income for this year is close to or more than your income from last year, pay in 100% of the amount you paid last year (or 110% of it, see above). You can find this figure on last year’s tax return.
- Perhaps your tax preparer gave you estimates to pay (we always do for our tax clients!). Even if these estimates are less than the 30-35% you’ve been saving, pay in the estimates and keep saving for any potential balance you may owe at the end of the year.
- If your income for this year is much less than last year, send in the savings you have been calculating each quarter as they’re due.
- Keep in mind that this approach is very basic, for a more detailed approach please reach out to your accountant.
Hire a Pro
- If your tax situation is a bit more complicated or the thought of not having enough paid-in by the end of the year gives you ass sweats, reach out to us. We can put together an estimate for you either annually or quarterly, and will take all of your circumstances into account (marriage, spouse that’s not self-employed, dependents, itemized deductions).
- Use a software like QB for Self-Employed to track your income and expenses, it’s affordable and it will calculate your estimates for you, too!
Steps to Pay Your Estimated Taxes to the IRS
- I recommend paying online using IRS Direct Pay
- Reason for Payment: Estimated Tax
- Apply Payment To: This will update automatically
- Tax Period for Payment: This will update automatically
- Press continue and then finish following the prompts to complete your payment
- Make sure to PDF the confirmation page showing the date, amount paid, and confirmation number. The IRS will also send you a confirmation email but all it has is the confirmation number – no other identifying information.
- If for some reason you can’t pay online, or don’t want to, you can send in a voucher with a check.
Tips on Paying Estimated Taxes to Your State
- Most states assess an income tax – here’s a link breaking down the states with an income tax, ones without, and any flat or progressive tax rates, ya know, for your reading enjoyment 🙂
- If you live in a state that does assess an income tax, it’s a good idea to send in estimated payments when you send in your federal payments.
- Most states also have an online filing system – to find the deets for your state, just search online for “state name pay estimated tax online” – this link will also lead you to how to mail in your payments, too.
Some Things to Keep in Mind While Calculating and Paying Your Estimated Taxes
- Even if you have a business (Sole Prop, LLC, S-Corp, Partnership), these taxes are still going to be paid and reported under your SSN, not your EIN – this is because these entities are considered pass-through entities. This means that all of the income and expenses will flow through to your personal return and the business’ tax will be paid at the individual level.
- Some states/cities do assess a corporate tax on some pass-through businesses, two examples are NYC and DC – both cities assess a separate S-Corp tax. You can search online to figure out if your state has any additional income taxes at the business level or reach out to us!
- If your business is a C-Corp, the information included in this post does not apply to your specific circumstances.
- Even though the estimated taxes are technically your personal taxes, I always like to pay them from my business account – this way all the business-related activity is all in one place and keeping track of what’s been paid is easier. If you’d rather use your personal account, that’s fine, just keep it consistent.
Due Dates for Estimated Taxes
- Q1 – Due April 15th
- Q2 – Due June 15th
- Q3 – Due September 15th
- Q4 – Due January 15th
Please reach out, we’d love to help!
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Countless assumes no liability for actions taken in reliance upon the information contained herein.