In this week’s Ask the Tax Expert, we cover how to calculate estimated taxes you owe. As you may know, small business owners and self-employed workers often have to pay estimated taxes four times a year.
Question: This will be my first time filing taxes as an independent insurance agent. I’m not sure how to calculate estimated taxes. I am not sure if the annualized calculator is right for me, because my income is not the same every quarter. Any advice?
-Breanna in Warner Robins, GA
Stephen Fishman: You must pay estimated taxes if you are a sole proprietor, a partner in a partnership, or member of a limited liability company and you expect to owe at least $1,000 in federal tax for the year.
Estimated taxes are due four times per year: April 15, June 15, September 15, and January 15. These tax due dates can shift slightly based on holidays and weekends).
|Income Received for the Period||Estimated Tax Due Date|
|Jan. 1 through March 31||April 17|
|April 1 through May 31||June 15|
|June 1 through Aug. 31||Sept. 15|
|Sept. 1 through Dec. 31||Jan. 15 of the following year|
How To Calculate Estimated Taxes
If you don’t pay enough estimated taxes during the year, the IRS will impose a penalty when you file your annual return (Form 1040). There are three ways to calculate your estimated taxes:
|Base It On Last Year's Taxes||Base estimated taxes on the tax you paid the previous year. No penalty if the amount you pay is equal to 100% of the tax you paid the previous year.||People who have confidence their net income will be similar or exceed that of last year.|
|Base It On Taxable Income for Current Year||Estimate what your net income will be for the year, divide it into 4 equal payments. No penalty if you pay at least 90% of your tax due for the year||People who believe their net income for the year will be less than the previous year.|
|Base It On Quarterly Income||Calculate your tax liability at the four quarterly tax deadlines, with prorated deductions. You must file IRS Form 2210 with your tax return||People who have income that is unevenly distributed throughout the year, like a Christmas tree salesperson.|
Payments Based On Last Year’s Taxes
The easiest way to calculate your estimated taxes is to base them on the tax you paid the previous year. You won’t have to pay a penalty if the total estimated tax you pay (plus any amounts you had withheld, if any) is equal to 100% of the tax you paid the previous year or 110% if you’re a high-income taxpayer (those with adjusted gross incomes of more than $150,000 or $75,000 for married couples filing separate returns). This is so even if your income is much higher this year than last.
Payments Based on Estimated Taxable Income
You can base your tax on your taxable income for the current year. If you think your net income will be less than last year, this could mean a lower tax bill. First, estimate what your income will be this year. Then, divide your total estimated tax for the year into four equal payments. You won’t have to pay a penalty if you pay at least 90% of your tax due for the year. You don’t need to make an exact estimate of your taxable income for the year.
Payments Based on Quarterly Income
This is a more complicated way to calculate your tax bill. But, this could come in handy if your income is unevenly distributed. For example, if the holidays bring in the bulk of your revenue, it may be worth using this method.
- It requires you separately calculate your tax liability at the four tax deadlines. You’ll have to prorate your deductions and personal exemptions, too. If you use this method, you must file IRS Form 2210 with your tax return to show your calculations. To use the annualized income installment method, you complete a worksheet at the end of each payment period and figure the payment due.
You can easily calculate your estimated tax payments using all three methods with tax preparation software. The IRS also has an estimated tax webpage you can use.
Each week, our resident small business tax expert, Stephen Fishman, answers your small business tax questions. Have a tax question for Stephen? Submit it here.
MileIQ’s blog does not constitute professional tax advice. You should contact your own tax professional to discuss your situation.