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Learn how to calculate your estimated tax payments with our step-by-step guide. Ideal for freelancers and business owners, this post covers estimating income, deductions, and credits to help you meet your tax obligations and avoid penalties!
For many taxpayers—especially freelancers, business owners, and investors—making estimated tax payments is a necessary part of financial life. Unlike W-2 employees, who have taxes withheld automatically, individuals who earn income without automatic withholdings (from a business, rental property, or investments) are responsible for paying taxes quarterly. Failing to do so can lead to hefty penalties at tax time.
In this guide, we’ll break down everything you need to know about estimated tax payments, from what they are and who needs to pay them to how you can calculate these payments yourself. By the end of this post, you’ll have a clear understanding of how to manage your tax obligations throughout the year without feeling overwhelmed.
Estimated tax payments are periodic tax payments made to the IRS (and sometimes to your state tax agency) throughout the year. These payments are generally required from individuals or businesses that receive income without tax withholding, such as:
The concept behind estimated tax payments is straightforward: instead of waiting until the end of the year to pay your tax bill, you pay it in smaller chunks throughout the year.
The IRS generally expects estimated tax payments from you if:
If you’re employed and have taxes withheld from your paycheck, you may not need to worry about estimated taxes. However, if you have a side hustle or earn income from other sources (such as investments), you may need to make these payments.
Pro Tip: Even if you have a traditional job, if you have significant side income, it may make sense to increase the amount withheld from your regular paycheck rather than deal with quarterly payments.
Estimated taxes are typically due four times a year:
If any of these dates fall on a weekend or holiday, the due date moves to the next business day. It’s crucial to keep track of these dates to avoid penalties.
Now that we know when estimated taxes are due, let’s get into the most crucial part—how to calculate them.
Start by estimating your total income for the year. This should include:
The more accurate your income estimate, the more precise your tax payments will be. Consider using tools like income statements, invoices, or bank statements to project your income. For instance, if you are a freelancer, reviewing your previous year’s income and the current contracts can give you a good estimate. That said, it’s fine if your estimates are off; you can always adjust your payments later in the year as your income fluctuates.
Next, subtract any deductions and adjustments to your income to arrive at your adjusted gross income (AGI). Common deductions include:
If you have considerable deductions, it might be worth itemizing instead of taking the standard deduction. Keep in mind that itemizing can be more time-consuming, as it requires detailed record-keeping.
Once you have your AGI, you’ll need to calculate your taxable income. If you’re itemizing deductions (like mortgage interest, charitable donations, or medical expenses), subtract those as well to get your taxable income.
For most taxpayers, using the standard deduction is easier and still provides significant tax savings. In 2024, the standard deduction for single filers is $14,600, while married couples filing jointly can deduct $29,200.
For example, if your AGI is $45,400 and you have $5,000 in itemized deductions, your taxable income would be:
With your taxable income in hand, you can now apply the appropriate tax rates for the year. The U.S. tax system is progressive, which means you pay different rates on different portions of your income. The 2024 tax brackets (taxes due April 2025) for single filers are:
Let’s say your taxable income is $40,400. Your tax calculation would look like this:
Adding these together:
If you’re self-employed, don’t forget to add self-employment taxes, which cover Social Security and Medicare. For 2024, the self-employment tax rate is 15.3% on your net income (12.4% for Social Security and 2.9% for Medicare).
For instance, if your net income from self-employment is $40,000, you’d owe:
Half of this amount (i.e., $3,060) can be deducted from your taxable income as a business expense, which reduces your overall tax burden.
Continuing from the previous example, let’s say your self-employment income is $40,000. Here’s how your self-employment tax would be calculated:
You can then deduct half of this from your taxable income when you file your taxes. So:
If your taxable income before the self-employment deduction was $41,150, it would now be:
Now, you can recalculate your tax liability based on this new taxable income.
Tax credits are subtracted directly from your total tax liability, so they can significantly reduce what you owe. Some common tax credits include:
Let’s assume you qualify for a $1,500 child tax credit. You’d subtract this from your tax liability. If your original tax bill was $4,718, it would now be:
Once you have your total estimated tax liability, divide that amount by four to determine your estimated quarterly payments. For example, if your total tax liability is $3,218, your quarterly payment would be:
You can round this up or down to simplify your payments; just make sure that you’re comfortable with the total amount you’ll be paying in taxes.
Calculating your estimated tax payments might seem daunting at first, but with careful planning and organization, you can effectively manage your tax obligations throughout the year. By breaking down the process into manageable steps—estimating your income, calculating deductions, applying tax rates, factoring in self-employment taxes, and considering tax credits—you’ll have a clearer picture of what you owe and how to pay it.
If you find yourself overwhelmed, consider consulting a tax professional who can guide you through the process and ensure that you’re meeting all your tax obligations without overpaying.
Remember, the key to staying on top of your taxes is being proactive. By making estimated tax payments on time and keeping track of your financial situation, you can avoid penalties and make tax season a much smoother experience. Happy filing!
Being audited is comparable to being struck by lightning. You don't want to practice pole vaulting in a thunderstorm just because it's unlikely. Making sure your books are accurate and your taxes are filed on time is one of the best ways to keep your head down during tax season. Check out Vincere's take on tax season!
This post is just for informational purposes and is not meant to be legal, business, or tax advice. Regarding the matters discussed in this post, each individual should consult his or her own attorney, business advisor, or tax advisor. Vincere accepts no responsibility for actions taken in reliance on the information contained in this document.
For business tax planning articles, our tax resources provides valuable insights into how you can reduce your tax liability now, and in the future.
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