Estimated Tax Payments (Quarterly)
It could seem tedious to pay anticipated quarterly taxes four times a year. However, if you plan these quarterly payments properly, it might lessen your tax burden. Because you will have already paid your estimated tax bill when tax filing season comes around.
This article will walk you through an example that will help you understand how to calculate and pay your federal anticipated quarterly taxes.
Estimated Tax Payments: What Are They?
If you’re self-employed, you often have to pay taxes in four “estimated payments” every year rather than all at once. It’s called “estimated” because you’re paying taxes on the amount of income you anticipate earning this year (federal income tax, self-employment tax, and any other applicable taxes).
Is It Necessary for Me to Pay Estimated Taxes?
If you plan to file as a sole proprietor, partnership, S corporation shareholder, or self-employed individual and expect to owe taxes totaling $1,000 or more, you’ll often need to make anticipated quarterly tax payments.
A corporation filing a tax return expects to owe $500 or more in taxes for the current year, it is typically required to make anticipated tax payments. If your income falls under these IRS minimums, you’ll probably need to file quarterly estimated taxes.
Visit Your Part Time Accountant if you require assistance with your estimated taxes. Your books will be organized. And we’ll take care of the necessary federal tax forms (you simply need to pay the taxes themselves!).
You Are Exempt From Paying Estimated Taxes
If you’re an employee, your employer should be withholding taxes on your behalf every quarter. Despite this, they occasionally make mistakes with the amounts. Complete Form W-4 and present it to your employer to ensure that the right amount is being withheld.
You are exempt from paying anticipated quarterly taxes if you satisfy all three of the very strict requirements listed below:
- You were exempt from filing an income tax return for the prior tax year since you owed no taxes.
- You spent the full year as a citizen or resident of the US.
- Your tax year lasted for 12 months.
If none of the mentioned requirements for non-payment apply to you, you’re one of the many Americans who must pay anticipated quarterly taxes. Continue reading if this is the case.
How to Figure Out Your Anticipated Taxes
You will tally up your whole tax obligation for the current year. Including self-employment tax, individual income tax, and any other taxes, then divide that sum by four to determine your projected taxes.
The IRS Estimated Tax Worksheet, contained in Form 1040-ES for individual filers and Form 1120-W for companies, can be used to compute your estimated taxes. You will receive payment vouchers and detailed instructions for performing these calculations on the spreadsheet.
To learn more about how to compute your anticipated taxes, continue reading.
How to Calculate Your Projected Taxes in Detail
Estimate your taxable income for the year in step one.
The income tax will come first. You can calculate your annual income to determine how much income tax you’ll need to pay. Then, you deduct any above-the-line deductions you anticipate making for the entire year.
$90,000 (estimated income) minus $15,000 (above-the-line deductions) = $75,000. This new number is “adjusted gross income.”
Then you deduct the $12,950 standard deduction that will apply to single taxpayers in 2022.
Additionally, you can write off half of your $12,716.59 in self-employment taxes (calculated below). You can write off $6,358.
So, your projected taxable income for the entire year is $55,692.
Step 2: Compute Your Income Tax
The amount of tax owing is then calculated by multiplying your adjusted gross income by the income tax rate (based on the tax bracket in 2023). The tax rates vary each year, so make sure to check the most recent figures.
So, your anticipated yearly income tax liability comes to $7,869.24 based on your tax bracket.
Calculate Self-Employment Tax in Step Three
You must additionally pay self-employment tax because you made more than $400 this year. You must first multiply your anticipated total revenue ($90,000) by 92.35% to get your self-employment tax liability. This is actual self-employment taxable income. The self-employment tax rate of 15.3% is then multiplied by this figure. What is the source of the 15.3%? It consists of the 12.4% Social Security tax and the 2.9% Medicare tax. They add up to the 15.3% “self-employment tax” total.
Therefore, your total self-employment tax is calculated as follows: $90,000 x 92.35% x 15.3%, or $12,716.59.
Step 4: Add Everything up and Divide It by 4
Now for the last stage. You just add up your self-employment tax and income tax for the year. And divide this sum by four to determine your expected quarterly tax payments for each quarter.
Your total estimated taxes are $8,130.24 + $12,716.59 = $20,846.83.
Because of this, the quarterly tax payment is $5,211.71 ($20,846.83/4).
They should be able to send you estimates for this year’s payments if you used a CPA to assist you to file your taxes the prior year. Additionally, it wouldn’t hurt to have your statistics reviewed by a CPA before submitting. Especially if you were paying quarterly anticipated taxes for the first time.
When Is the Projected Tax Payment Due?
As the name suggests, expected quarterly tax payments are due on the 15th of April, June, September, and January each year. Or the following working day if the previous day falls on a weekend or holiday.
The projected quarterly tax deadlines for 2022 are listed below.
- January 1 to March 31: April 18
- April 1, until May 31, and June 15
- September 15 for the time frame of June 1 to August 31
- September 1 through December 31: January 17 of the subsequent year
Setting these deadlines in your calendar at the beginning of each tax year is a smart move.
Note: Due dates are moved to the following business day if they fall on a weekend or legal holiday.
How to Pay Your Anticipated Taxes
Fill out complete form 1040-ES and mail it to the IRS office that is closest to you. Together with a cheque or money order to send your payment to the IRS.
- The IRS Payments Gateway also accepts credit card payments made over the phone or online.
- The Electronic Federal Tax Payment System must be used to file payments for corporations.
Tax Fines Can Be Painful
For several reasons, the IRS may charge penalties on quarterly tax payments.
Defaulting on payments, not enough tax was paid for the year
You must pay at least 90% of your tax bill for this year or 100% of the taxes you owed for the previous year. Whichever is less, to avoid an overpayment or underpayment penalty.
The Projected Tax Payment Safe Harbor Rule
The safe harbor rule is the practice of paying 100% of the federal taxes owed on your tax return from the previous year. If you pay the same amount as you did the year before, penalties won’t apply. Even if your income increased this year.
One crucial qualification: You must pay 110% of the taxes you paid the previous year if your yearly income exceeds $150,000.
As a business owner, paying taxes four times a year won’t be the most enjoyable activity. But with the right planning, efficient recordkeeping, and tax-ready books, it may be one of the easiest. When in doubt, a tax expert can assist you in calculating your estimated tax payments to take the uncertainty out of the process.
This manual only addresses federal taxes. You might also need to set up quarterly state tax payments if you reside in a state that levies income taxes.