How do i calculate estimated taxes
How do I calculate estimated quarterly taxes?
The IRS has a complicated schedule to calculate your quarterly estimated taxes in IRS Form 1040-ES. The schedule is actually way more complicated than I think is necessary, but there is one important thing that comes out of it: the minimum amount you have to pay to avoid penalties. This amount is found on line 14c:
If you’re really worried about being penalized I would recommend you see a tax professional who can help you figure out what your quarterly taxes should be.
If you use a tax software like TurboTax you might notice that they take a far more simplified approach that is similar to the below example:
Download the Quarterly Estimated Tax Calculator if you want to plug in numbers yourself.
TurboTax will also populate printable quarterly estimated tax payment forms for you, which I used last year. I wouldn’t necessarily suggest using their calculation, though. Side income can vary greatly year-to-year. My side income was 15x higher in 2013 than in 2012. Needless to say, the quarterly payments I made in 2013 were far too low. If my income dramatically changed again in 2014 I may end up over-paying or under-paying by a significant amount.
While you don’t want to pay less than the amount that TurboTax populates, you might want to pay more. An alternative formula you could use is:
This calculator is also available for download – Quarterly Estimated Tax Calculator .
Note: If you do decide to estimate your quarterly payments through this alternative method, be sure to make sure that the calculated amounts are at least as much as the ‘TurboTax’ method. Again, if you are worried about paying less than the minimum, you should consider talking to a tax professional.
You can print out your own quarterly estimated tax forms by going to IRS Form 1040-ES. These forms are blank and you can fill out whatever amount you want. Be sure that your
quarterly payments are a consistent amount each quarter, though you can typically increase the amounts in later quarters if your income projection was too low.
Where do you send your quarterly estimated taxes? That information is (not surprisingly) found in IRS Form 1040-ES (click for larger image):
State Income Taxes
If you live in a state that has an income tax (or in other words, a majority of states), you will also need to make quarterly estimated taxes to your State. You can use the same formula above to estimate how much you will owe, but simply allocate between Federal/State.
For example, let’s say I calculated that I will make approximately $20,000 in income next year. As it shows in the calculator above, I will need to pay in $2,367.50 per quarter. But that includes both Federal and State income taxes. How do you determine the amount to pay each quarter to the Feds and the amount to pay each quarter to the State?
For simplicity’s sake I will take the $20,000 in estimated income and multiply by the 7.05% Minnesota income tax rate. That brings me to $1,410, or $352.50 per quarter. To calculate the Federal estimated quarterly tax, simply subtract $352.50 from the $2,367.50 we calculated earlier. That brings us to $2,015, which is how much should be paid to the Federal government each quarter.
You will have to Google and search for your specific state’s quarterly estimated tax forms, but if you live in Minnesota you can find yours here .
Have you had to pay quarterly estimated taxes? What are your thoughts/questions/advice on the topic? Please share in the comments!
DISCLAIMER: I’m not a tax professional. I’m just a guy who makes side income and has found quarterly estimated tax payments to be overly complicated. I hope you find this article useful but please realize I do not guarantee this information is 100% correct. Taxes are complicated and you should always consult a tax professional on these topics.Source: www.youngadultmoney.com