Taxes
How to calculate & pay estimated taxes for the first time
If you're self-employed, paying estimated taxes is old hat by now. But, what if this is your first time doing it? Here's how to calculate, pay estimated taxes for the first time.
What are estimated Taxes?
When you're self-employed, no taxes are withheld from your compensation by your clients or customers. Yet, this doesn't mean you can simply wait until April 15 to pay all your taxes for the prior year. The IRS wants to get its money a lot faster than that. So what are estimated taxes? The self-employed are required to pay taxes on their estimated annual incomes in four payments spread out over each year. These are called estimated taxes. These pay for both income These pay for both income taxes and self-employment taxes (Social Security and Medicare taxes). The IRS imposes penalties if you don't pay enough estimated tax. You must pay estimated taxes if you are a sole proprietor, a partner in a partnership, or member of a limited liability company and you expect to owe at least $1,000 in federal tax for the year. Most self-employed people are sole proprietors. A sole proprietor and their company are one and the same for tax purposes. Simply pay your estimated taxes out of your own pocket. You, not your business, pay the taxes.
You may not have to pay estimated taxes
You don't have to pay any estimated tax this year if you paid no taxes last year. This applies no matter your income for the year. This only applies if you're a U.S. citizen or resident for the prior year. Also, your tax return for that year must have covered the whole 12 months. You also don't have to pay estimated tax if you have a W2 job and the amount withheld will amount to at least 90 percent of your total tax bill. You can avoid paying estimated tax by increasing your employee withholding.
How much estimated tax to pay the first year you're in business?
If you're just starting your business, how do you know much to pay? You may have no idea how much money you'll earn during the year. So, you won't know how much tax you'll end up owing. Fortunately, you can avoid this issue. You won't have to pay any penalties if the estimated tax you pay is at least the smaller of:
- 90 percent of your total tax due for the current year or
- 100 percent of the tax you paid the previous year or 110 percent if you're a high-income taxpayer (those with adjusted gross incomes of more than $150,000 or $75,000 for married couples filing separate returns).
The easiest and safest way to calculate your estimated taxes is to simply pay 100 percent of the total federal taxes you paid last year. You should pay 110 percent if you're a high-income taxpayer. You can base your estimated tax on the amount you paid the prior year even if you weren't in business that year. But, your return for the year must have been for a full 12-month period. Divide the total amount of tax you had to pay for the year by four. You can round up this figure to an even number. That's your estimated tax amount you should pay.
