Estimated Taxes: Painful and Pain Free

It is often so overlooked but, oh, so very important. I have had a lot of clients who have ignored paying estimated taxes throughout the year, and have shed tears, some literally, come tax time. What are estimated taxes?

ESTIMATED TAXES: WHAT IS IT?

This is what you pay on income that does not have taxes withheld from it. If you are working a regular job and receive a paycheck, federal and state taxes are withheld on your paycheck and paid to the IRS. On other types of income, taxes are not auto withheld, so the person receiving the income (you) is responsible for calculating and paying in those taxes. The calculated taxes you pay are called estimated taxes.

 

WHO SHOULD PAY IT?

  • If you are a business owner who does not get a salary I do not mean owner draw), but a salary with payroll taxes, you should be paying estimated taxes.
  • If you are a freelancer and being paid on a 1099MISC, you should be paying estimated taxes
  • If you have a grant or fellowship and taxes are not being withheld, you should be paying estimated taxes

 

WHY YOU SHOULD PAY IT?

You are required to pay taxes on income – that is a good a reason as any. One way or another, if you are not paying it via payroll taxes, you will pay taxes on your income, through your tax return.

 

PAINFUL PART

It is difficult to take a look at your profit at the end of  weeks or a month (I do not advise to go longer than that) and then write a check to someone, especially the IRS, out of it. As painful as it is, it is necessary and ultimately easier to do this biweekly or once a month or every quarter – depending on the level of your business and profit – than waiting to do this once a year.

 

PAIN FREE PART

At the end of the year, when filing taxes, if you have overpaid, you will get money back, if you have underpaid on your estimated taxes, you wont owe as much.

Scenario 1: say that your tax liability (after deductions and so on) at the end of the year is $2000, but you have paid $200 a month for a grand total of $2400 a year. This means that you are getting back a $400 refund. If you hadn’t paid estimated taxes, you would owe the entire $2000 + penalty for not paying.

Scenario 2: Let us say that the tax liability (after deductions and so on) is $3000 and you have paid $2400 for the year. It means you owe the IRS $600. If you hadn’t paid estimated taxes, you would owe the entire $3000 + penalty for not paying.

In either scenario, if you hadn’t paid the entire amount, you would be handing over a large chunk of money at once.

 

HOW TO CALCULATE ESTIMATED TAXES

The IRS has a table that can be used to figure out what your rate is:

Table 1. Single Taxable Income Tax Brackets and Rates, 2017
Rate Taxable Income Bracket Tax Owed

10%

$0 to $9,325 10% of Taxable Income

15%

$9,325 to $37,950 $932.50 plus 15% of the excess over $9325

25%

$37,950 to $91,900 $5,226.25 plus 25% of the excess over $37,950

28%

$91,900 to $191,650 $18,713.75 plus 28% of the excess over $91,900

33%

$191,650 to $416,700 $46,643.75 plus 33% of the excess over $191,650

35%

$416,700 to $418,400 $120,910.25 plus 35% of the excess over $416,700

39.60%

$418,400+ $121,505.25 plus 39.6% of the excess over $418,400
 

Table 2. Married Filing Joint Taxable Income Tax Brackets and Rates, 2017

Rate Taxable Income Bracket Tax Owed

10%

$0 to $18,650 10% of taxable income

15%

$18,650 to $75,900 $1,865 plus 15% of the excess over $18,650

25%

$75,900 to $153,100 $10,452.50 plus 25% of the excess over $75,900

28%

$153,100 to $233,350 $29,752.50 plus 28% of the excess over $153,100

33%

$233,350 to $416,700 $52,222.50 plus 33% of the excess over $233,350

35%

$416,700 to $470,700 $112,728 plus 35% of the excess over $416,700

39.60%

$470,700+ $131,628 plus 39.6% of the excess over $470,700
 

Table 3. Head of Household Taxable Income Tax Brackets and Rates, 2017

Rate Taxable Income Bracket Tax Owed

10%

$0 to $13,350 10% of taxable income

15%

$13,350 to $50,800 $1,335 plus 15% of the excess over $13,350

25%

$50,800 to $131,200 $6,952.50 plus 25% of the excess over $50,800

28%

$131,200 to $212,500 $27,052.50 plus 28% of the excess over $131,200

33%

$212,500 to $416,700 $49,816.50 plus 33% of the excess over $212,500

35%

$416,700 to $444,500 $117,202.50 plus 35% of the excess over $416,701

39.60%

$444,550+ $126,950 plus 39.6% of the excess over $444,550
Source: IRS.

 

HOW TO PAY ESTIMATED TAXES
  • Send in a 1040-ES and a check to the IRS
  • If you are a corporation, pay it with the 1120W
  • Pay via EFTPS.gov

If you haven’t paid for the first quarter of the year, it is not too late to pay – it never is. Just make sure you pay it as soon as possible.

 

If you have questions or need help with your estimated taxes, reach out to us at Dollars In Line

About Chizoba Morah 119 Articles
Accountant, bookkeeper, tax planner! I have an MBA and have been involved in Accounting and tax preparation for over 10 years. My clients include individuals, businesses of all forms (including corporations) and sizes small to large).

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