How to Calculate and Pay Estimated Quarterly Taxes
By Cameron McCool on January 18, 2017
Paying estimated quarterly taxes four times per year may seem like a chore. But if you project these quarterly payments correctly, it can actually ease your tax burden come tax time. When tax season rolls around, you’ll have already paid your approximate tax liability.
In this guide, we’ll show you how to calculate and pay your federal estimated quarterly taxes, and walk you through an example that clarifies the process.
Estimated tax payments are due four times per year, in April, June, September, and January .
Here are the estimated quarterly tax deadlines:
- For the period Jan 1 to March 31: April 18
- For the period April 1 to May 31: June 15
- For the period June 1 to August 31: September 15
- For the period September 1 to December 31: January 17
It’s a good idea to set these dates in your calendar at the start of every tax year.
Getting your payment to the IRS is fairly straightforward: you simply need to fill out form 1040-ES and mail it along with a check to the IRS office closest to you.
Alternatively, you can pay online or by phone via the IRS Payments Gateway .
Unfortunately, knowing why you have to pay estimated quarterly taxes and figuring out how to submit them is the easy part. The hard part is calculating how much you should actually pay each quarter.
The first thing to consider is how much tax your business will owe at the end of the year.
If you intend to file as a sole proprietor, a partnership, S corporation shareholder, and/or a self-employed individual, you’ll generally need to make estimated quarterly tax payments if you will owe taxes of $1000 or more. Businesses that file as a corporation generally need to make estimated tax payments if they expect to owe $500 or more in tax for the year.
If you don’t meet these minimums, you’re off the hook . If you do need to pay estimated quarterly taxes, read on.
To calculate how much your estimated quarterly tax payments will be, first, estimate your expected adjusted gross income, taxable income, deductions, and credits for the year. One way to do this is to use your income, deductions, and credits from last year as a guide.
Once you have estimated these figures, it’s a simple matter of applying a few, simple calculations to figure out how much you’ll owe in your estimated quarterly tax payments. The Estimated Tax Worksheet found in Form 1040-ES will guide you through these calculations in detail.
Use this guide to automate your accounting admin, and avoid hours of tedious financial admin each month.
To make the process clear, here’s an example of how Stephanie, a sole proprietor, would calculate her estimated quarterly tax payments, based on her income tax and self-employment tax owed.
Let’s start with Stephanie’s income tax. In order to estimate how much income tax she will have to pay for the year, Stephanie multiplies her taxable income by the percentage indicated by her tax bracket for 2015 . Tax brackets change each year, so be sure to consult the most recent numbers. This calculation gives Stephanie her estimated income taxes owed for the year.
Because Stephanie earned more than $400 this year, she will also have to pay self-employment tax . To calculate self-employment tax, she first has to multiply her taxable income by 92.5% – this is effectively her self-employment taxable income. She then multiplies this number by 15.3%, the self-employment tax rate. Now she also knows her estimated self-employment taxes .
Now, the final step. In order to calculate her estimated quarterly tax payments for each quarter, Stephanie simply adds together her income tax and her self-employment tax for the year and divides this number by four.
- Not paying on time
- Not paying enough estimated tax for the year
- Paying too much estimated tax
There are a couple of things you can do to avoid these penalties: either at least 90% of what you owe in taxes this year, or pay the same amount (100%) of the taxes you owed last year, whichever is smaller.
Paying 100% of the taxes you owed in the previous year is sometimes referred to as the safe harbor rule . Even if your income grew this year, you will avoid penalties if you match the payments that you owed in the previous year (but you will still have to make up the additional tax payments).
One difference to note is that if your income is more than $150,000 per year, then you are required to pay 110% of what you paid in taxes last year in order to avoid underpayment penalties.
Paying taxes four times a year won’t be the most fun thing you’ll do as an entrepreneur, but proper preparation, organized small business recordkeeping , and tax-ready books will help streamline the task
This guide only covers federal taxes. If you live in a state that charges income tax, you may also need to set up quarterly state tax payments.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.
Cameron writes for Bench, the online bookkeeping service for entrepreneurs.
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How alimony payments affect your taxes when you’re the payee or the payer
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The tax ramifications of divorce affect both parting partners when alimony is a part of the divorce decree.
If you are the ex-spouse getting alimony payments, the money is taxable to you as income in the year it is received. This added income calls for a couple of additional tax considerations for the recipient.
And if you’re the former husband or wife paying spousal support, you get a tax break.
First, because no taxes are withheld from alimony payments, you might need to make estimated tax payments or increase the amount withheld from your paycheck. If you don’t, you could end up owing the Internal Revenue Service when you file your final return.
Secondly, your option to file shorter, simpler tax forms disappeared with that first alimony check you cashed. Alimony payments must be reported on line 11 of the long Form 1040.
What about the ex making the payments? He or she may complain every month when writing the check, but that taxpayer now has a new tax deduction.
Alimony payments are subtracted from the payer’s income on line 31 of Form 1040. In addition to entering how much alimony was paid, the filer must include his or her ex-spouse’s Social Security number. This enables the IRS to cross-check deducted payments against reported alimony income.
A spouse who gets alimony and refuses to give his or her ex a tax ID number could face a $50 tax penalty. And if you as the payer know the number but forget to write it on your return, you could face a separate $50 penalty. Worse, if the alimony recipient’s tax ID is missing, the IRS could disallow the deduction.
In cases where a divorce decree calls for alimony and child support, and the amount of each is specifically stated, only the alimony is taxable. Child support is not taxable as income, nor can the partner paying it deduct the cost.
The IRS provides more information on tax issues facing divorced couples in Publication 504, Divorced or Separated Individuals.
Home › Tax › Does half your money go to taxes?
Every year tax time is a good reason to complain about paying too much tax. One of the big misconceptions I hear over and over again is this notion that we pay half of our money to the government. Just recently, someone showed me an insurance proposal where the advisor used a 50% tax rate to illustrate the benefits of a tax sheltered life insurance policy. We pay a good chunk of tax but this is very misleading to me!
It’s nearly impossible for the average Canadian to really figure out how much tax they pay especially when you include all forms of tax from all three levels of government like sales taxes, import duties, excise taxes, gas tax, payroll tax, etc.
The Fraser Institute in Canada calculates tax freedom day every year. Tax Freedom Day is the theoretical day in the year the average Canadian family has earned enough money to pay the taxes imposed on it by the three levels of Canadian government: federal, provincial, and local. Taxes used to compute Tax Freedom Day include income taxes, property taxes, sales taxes, profit taxes, health taxes, social security and employment taxes, import duties, licence fees, taxes on alcohol and tobacco, natural resource fees, fuel taxes, hospital taxes, and a host of other levies.
Tax freedom day has lead many people to believe 50% of their money goes to tax in some way shape or form. In 2016, Tax Freedom day was June 7th. In theory this means we pay 43% in tax, not 50%. Here's some tax freedom dates from the past:
- June 7. 2016
- June 10, 2015
- June 9, 2014
- June 10, 2013
- June 11, 2012
- June 10, 2011
- June 6, 2010
- June 3, 2009
- June 22, 2005
- June 25, 2000 (latest tax freedom day)
- May 3, 1961 (earliest tax freedom day)
Tax freedom day is also different from province to province. Here in Alberta, we enjoy the lowest tax freedom day in Canada, which was May 17 in 2016. On that basis, this translates to a 38% tax rate, which is far from 50%.
Even at the peak of tax in 2000, tax freedom day in Canada was June 25 th , which makes it closer to that 50% figure.
I’ve been following the tax freedom day for quite some time now but I’m always skeptical of the dates given because they seem to be inconsistent. I think it’s an interesting view of tax but another perspective is to look just at marginal tax rates (including both Federal and Provincial Income Tax).
A lot of times, people use marginal tax to reflect how much tax we pay but this can also be misleading. Marginal tax is the amount of tax we pay on any additional dollar we earn. As we make more money, we pay more tax. To understand your marginal tax rate (MTR), you can start with the federal tax rates (2016):