Calculating Quarterly Estimated Taxes for the Self-Employed

March 20, 2013 at 9:00 am (Business Taxes, General Tax Information)

It’s that time of year again when taxpayers often pay an underpayment penalty with their tax due and then decide that this is the year that they will plan ahead and pay estimated tax payments to thwart that penalty next year.

Estimated Taxes:

To know if you need to pay estimates, you need to calculate if the total tax you’ll owe on your tax return will be covered by the amount of tax you have already had withheld (if applicable). If you only have self-employment income, then you need to figure out what your tax liability will be after deductions and credits you may receive and then cover that.
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This is what the IRS states about it:

Generally, you should make estimated tax payments if you will owe tax more, than an amount specific by law, after withholding and credits, and the total amount of tax withheld and your credits will be less than the smaller of:

1. 90% of the tax to be shown on your current tax return, or
2. 100% of the tax shown on your prior year’s tax return, if your prior year’s tax return covered all 12 months of the year.
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Estimated tax is the one area where you may call the shots to the IRS. Generally you are able to choose when and how much to pay. Your options are Apr 15, June 15, Sept 15 and Jan 15, 2014. You can pay quarterly, just once, twice or three times and decide how much.

To help you calculate how much you should be paying in estimated taxes in a given quarter after possible deductions and credits have been deducted from your income, consult the IRS Tax Tables found in this pdf for 2013. More information can be found in the IRS Form 1040-ES instructions.

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