Paying your quarterly taxes may seem like a burden you wish you could pawn off to someone else. While no one is ever excited about filing their taxes, projecting your quarterly payments correctly can actually soften your tax burden when tax season rolls around. Our team a the Tax Crisis Institute has created a guide to help you calculate and pay your federal estimated quarterly taxes.
Do You Have to Make Estimated Tax Payments?
If you are self-employed, you are typically required to pay taxes four times a year in estimated payments. These payments are an estimate of how much money you will be making in a year and how much of that money will be taxed. These taxes include income tax, self-employment tax, and any other federal or state tax.
If you file as a sole proprietor, a partnership, S corporation shareholder, or self-employed, you will need to make estimated quarterly tax payments. Businesses that file as a corporation need to make estimated tax payments if they expect to owe $500 or more in taxes for the year.
Who Doesn’t Have to Make Estimated Tax Payments?
If you are an employee your employer should be withholding quarterly taxes on your behalf. With that being said, your employer may get your amounts wrong. You can combat this by filling out a Form-W4, giving it to your employer to be sure they’re entering the correct amounts. These following special cases are also exempt from estimated quarterly taxes:
- If you did not owe any taxes in the previous tax year
- You did not have to file a tax return in the previous tax year
- If you were not a US citizen or resident for the entire year
- Your tax year was 12 months long
If you don’t see anything that applies to you in the list above, then congratulations, you have to pay estimated quarterly taxes! There’s no reason to get stressed out though, paying these taxes can be easy.
How to Calculate Your Estimated Taxes
Now here comes the fun part, calculating your estimated taxes. You will add up your total tax liability for the year – including self-employment tax, income tax, and any other taxes and divide that number by four. Here’s a more in-depth breakdown of how to calculate all of these numbers.
1. Estimate Your Taxable Income
For the sake of this example, let’s say that you are expected to earn $90k in income for the year. Your first step is to subtract any above-the-line deductions you think you will incur for the year. Let’s assume that you will have $15k in above the line reductions this year.
90,000 (your estimated income) – 15,000 (your above-the-line deductions) = 75,000 (your adjusted gross income).
You will then subtract the standard deduction for single taxpayers in 2019, which is $12,200. This leaves you with a total estimated taxable income of $62,800.
2. Calculate Your Income Tax
Your next step is multiplying your adjusted gross income by your income tax rate according to the 2020 tax bracket. It’s important to note that these brackets change yearly. Make sure that you consult the recent brackets for the accurate number.
Based on your current tax bracket, your estimated income taxes owed for the entire year works out to be $9,803.50.
3. Calculate Your Self-employment tax
Since you earned more than $400 this year, you will have to pay a self-employment tax. You will multiply your estimated total income (90,000) by 92.35% – which is your self-employment taxable income. You will then multiply that number by 15.3%, which is the self-employment tax rate.
Your self-employment tax tota is 90,000 x 92.35% x 15.3% which is $12,716.59.
4. Add It All Up and Divide by Four
For the final step, you will add together your income tax, your self-employment tax and divide that number by four.
9,803.50 + 12,716.59 = 22,520.09
22,520.09/4 = 5,630.02
$5,630.02 will now be your quarterly tax payment. There are plenty of free estimated quarterly tax calculators available on the internet to help make this process easier for you.
How Do You Make These Payments?
Submitting your quarterly tax payments is far easier than it is to calculate these payments. Simply fill out Form 1040-ES and mail it along with a check to the IRS office closest to you. The IRS also provides an online gateway to pay over the internet or by phone.
For corporations, you will need to pay your taxes through the Electronic Federal Tax Payment System. Paying these taxes is easy once you realize how to calculate the number. It’s also important that you know when these taxes are due.
When Are Estimated Taxes Due?
As mentioned earlier, your estimated quarterly tax payments are due four times per year. Here are the 2020 estimated quarterly tax deadlines:
- Jan 1 to March 31: pay by April 15
- April 1 to May 31: pay by June 15
- June 1 to August 31: pay by September 15
- September 1 to December 31: pay by January 15 of the following year
If the 15th falls on a weekend or holiday, the date is pushed back to the next business day. Mark these dates on your calendar so you don’t forget!
There are several reasons why the IRS may impose penalties on quarterly tax payments. These payments can cost you and your business thousands of dollars in the long run. Here are some of the reasons you can be punished:
- Not paying on time
- Not paying enough
- Paying too much
To avoid an underpayment or overpayment penalty, you can pay 90% of your current tax bill or 100% of your previous year’s tax bill. Obviously, you or your company should do everything in your power to avoid these penalties.
Tax Crisis Institute Can Help
No one knows better than us the difficulties of keeping up with taxes and the stress of dealing with penalties. If are in desperate need of help to calculate your taxes, our team here at the Tax Crisis Institute is here for you. Contact us today to find out what it is we can do for you.