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Calculating and Paying Quarterly Estimated Tax Payments

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So I did my taxes over the weekend and found that I had a significant tax shortfall (more than I’ve ever had as a rebate, but I see it as a good thing) as a result of not paying quarterly estimated tax payments last year. Now, I wasn’t assessed a penalty because I paid more tax than I did the year before (I wasn’t within 90% of what I owed, which is the other ‘get out of jail free’ card) but this year I will have to be paying these estimated payments in order to avoid penalties. If I hadn’t paid more than last year, I would’ve had about a hundred and fifty bucks in penalties, which isn’t bad on an absolute scale but terrible when you consider it’s a completely avoidable loss. So, here is my rough and tumble guide to calculating and paying your quarterly estimated taxes.

Calculating How Much Tax You Owe

You must make quarterly estimated tax payments on any self-employment income you earn and the process of calculating the amount of that tax isn’t tricky but does require a calculator. The first thing you need to do is to figure out what your average tax rate is, which you can find on your previous year’s tax return by dividing your income tax (line 43 on your Form 1040) by your adjusted gross income (line 37 on your Form 1040), that is your average tax rate. As a self-employed person, you need to tack on an additional 15.3% for Social Security and Medicare. Now, you take that tax rate and multiple it by your quarterly profits and that’s the amount you need to pay.

Another safe way to go about it is to see how much you paid in taxes last year, estimate how much you’ll have withheld and subtract that value from your tax paid, add some buffer to that and divide it by 4. If your business is growing, you’ll still experience a tax shortfall but you’ll avoid penalties. So, if you have a tax liability of $10,000 for 2006, your job withheld $6,000 last year, then your shortfall was $4,000. Add some buffer, say another $400, and you should send in $1,100 each quarter. That means for 2007, you’ll have paid $11,600 in taxes which is more than the $10,000 you owed last year – penalties avoided.

Paying That Quarterly Estimated Tax

As for paying it, you have two options – the 1980 way of writing a check, or the 2000 way of sending payment through the Electronic Federal Tax Payment System. I recommend the EFTPS because you won’t lose a payment in the mail but if you use a check, be sure to make out the check to United States Treasury, your social security number on the check, and include a copy of Form 1040-ES. The due dates for payment are April 15th for the first quarter, June 15th for the second quarter, September 15th for the third quarter, and January 15th (of the following year) for the fourth quarter. Obviously, keep copies of all your checks, forms, etc. for tax time next year.

Now, another question I had was whether the payments have to be equal and they aren’t required to be equal but they should. I don’t know what the ramifications are if they aren’t equal but as long as you do a pretty good job of estimating, a small deviation probably isn’t a big deal.

(As with anything you read on blogs, please consult a tax professional before you take any action)

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12 Responses to “Calculating and Paying Quarterly Estimated Tax Payments”

  1. thc says:

    Jim: Our tax system is referred to as “pay as you go”. What that really means is, pay as you earn it. You asked if the payments need to be equal and the answer is no. You need to have adequate tax payments submitted to the IRS on a quarter by quarter basis. So, if your earnings are uneven it’s possible that all four payments are quite different than one another. It’s also possible that you only make payments for one or two quarters but not the others. It’s all driven by when you receive the earnings. Hope that helps.

  2. ispf says:

    [...] Your taxes are a little more complicated thanks to all those entrepreneurial ventures you have been juggling? You looked through the resources but are still not sure how to proceed? Then you might be interested at what Jim @ Blueprint for Financial Prosperity has to say about Calculating and Paying Quarterly Estimated Tax Payments. [...]

  3. joel says:

    I wasn’t aware of quarterly payments until this year, when I got to the end of my 1040 and discovered the quarterly payment/ penalty section. I too owe a healthy chunk because of side buisiness this year.

    My first reaction was infuriation: why would I have to pay a penalty if I’m paying a lump in April like everyone else does? What’s wrong with holding on to my money for a few months until April 15?

    Anybody have any history on quarterly payments?

  4. jim says:

    It’s because you’re supposed to pay as you go, most people don’t owe taxes because of withholding, and the rules state that you have to either: 1) paid within 90% of what you owe, or, 2) paid more tax than you did the year before. I didn’t pay the penalty because I paid more than I did the year before.

  5. Marcy says:

    My question is: I became an independent consultant March 1. So I had taxes with-held by my employer in Jan & Feb that are basically equal to what I calculate my quarterly tax liability to be. Do I still need to file a quarterly return in April, or could I wait until June? Obviously, the latter would be my preference.

    I’m also wondering about state tax – is that normally filed quarterly as well? Does it vary by state?

    • Bruce says:

      The withholding from the first two months, make sure when calculating your estimate that you take into consideration all of your income.

      Each state has it’s own set of rules. They generally follow along with IRS when it comes to estimates but check your state.

      Not all states have an “income tax” make sure yours does before you send them money.

  6. Kimberly says:

    My husband is a Owner Opperator and we need to pay quarterly taxes. Would it benefit us to lower my exemptions and take an additional amount each paycheck? How would he pay into social security and medicare.

  7. HOW DO I KNOW WHAT AMOUNT OF QUARTERLY TAX TO PAY? IN 2007
    DUE TO STOCK GAINS I PAY $80.000 TO IRS. IN 2008 I EXPECT TO PAY $25,000 TOTAL…WHAT QUARTERLY TAX SHOULD I PAY? THANK YOU

  8. Chas says:

    I am a US citizen working in Japan for a Japanese Firm.

    I received a equivalent to a W2 from my firm.

    Do I attach it to my return with the best English translation?

    I have learned that I do not need to pay SS taxes since Japan & US have a treaty.

    However, unemployment and medicare taxes need to be paid. How do I caculate the amounts and how to I pay the IRS.

    Can you help

  9. hogarth says:

    What I don’t understand about the payment schedule is that it is not truly “quarterly”.
    There is a 3-month gap between Jan15 and Apr15, then a 2-month gap between Apr15 and Jun15, followed by another 3-month gap between Jun15 and Sept15, and finally a 4-month gap between Sept15 and Jan15 of the next year.
    Thus it would not make sense to submit equal payments, even if your income was the same each month.
    Who developed this uneven pay schedule, and why is it uneven?

  10. [...] calculate your estimated tax payments should be, download  government tax form 1040-ES.  If your income is variable, it may be a bit of [...]

  11. Susan says:

    I’m beginning a new business and don’t have a previous years statement to go by. I am curious about what approx. percent of my net sales I will be paying in taxes. Do I get to pay myself a salary out of the gross? This is all new to me. I had no income last year.

    I have an online business and I was just going to keep a percentage of the sales in savings for taxes. Is there a good software or website that helps calculate cost of goods sold/inventory and other expenses to have a more accurate idea of what I should be saving and paying for quarterly taxes? Thank you, in advance, for your help!


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