Taxes are relatively simple when you earn a weekly salary. Your employer ensures that the Tax Man gets his share with each paycheck signed out to you by withholding taxes and sending them to the IRS.
However, things are different if you are self-employed or running a business. Non-wage income earners typically have to set aside some of their earnings and pay quarterly estimated taxes throughout the year.
In today’s blog, we talk about estimated quarterly taxes and how you can pay them in 2021.
What Are Estimated Taxes?
As mentioned above, business owners and self-employed individuals pay their dues to Uncle Sam via estimated quarterly payments instead of withholding.
If you fall in this category and receive tax forms other than a W-2, you need to make tax payments directly to the IRS, replacing the tax withheld for most individuals by their employers.
Estimated taxes apply to anything earned through self-employment and all taxable income earned directly without any withholding (capital gains, stock dividends, interest, etc.).
How To Calculate Estimated Taxes
There are four main steps to calculate your estimated quarterly payments:
1. Estimate Total Income
Start by figuring out your total estimated income for the year or each quarter. This will be simple for entrepreneurs earning a steady income from year to year but difficult for freelancers. In the latter case, it makes sense to calculate the exact income at the end of the quarter and pay taxes on that amount.
2. Determine AGI
When estimating total income, also account for deductions you plan to claim in order to calculate the Adjusted Gross Income (AGI). If you forget the deductions, you’ll pay more than you need to. You will also have to factor in your state tax burden if your state implements personal income tax.
3. Check Your Tax Bracket
The next step is to apply the tax percentage to the AGI. Multiply your total income by 92.35% for self-employment tax (if you earn more than $400/per year), and multiply the result by 15.3% to calculate what you owe for self-employment.
4. Divide The Total
Once you have calculated your estimated income, deductions, total income, and self-employment taxes, divide the total by 4 to determine quarterly payments.
In a nutshell: Income Taxes Owed + Self-Employment Tax = Total Estimated Taxes /4 = Quarterly Tax Payment.
How To Pay Estimated Taxes
There are several ways to make estimated payments:
- Pay online on the IRS website directly from your bank account (no charges)
- Pay online via credit card (at a charge of $2.59 or 2% of your payment)
- File taxes using the voucher that comes with the tax form and a check
Try to pay within the deadlines. If you miss a deadline, try to make the payment as soon as possible to prevent fines and penalties.
2021 Tax Dates
Here are the deadlines for this year:
- January 15, 2021 (Fourth Quarter 2020)
- April 15, 2021 (First Quarter)
- June 15, 2021 (Second Quarter)
- September 15, 2021(Third Quarter)
- January 15, 2022 (Fourth Quarter)
Mark these dates and have a system in place to make your payments.
Are Estimated Taxes Mandatory?
Accounting and bookkeeping inaccuracies are natural, considering the complex nature of tax law. That’s why the IRS has a ‘safe harbor’ provision to help taxpayers avoid penalties for inaccuracy.
You can be exempt if your estimated tax and withholding makes up at least 90% of the total tax you owe for the year (110% if you have an AGI over $150,000).
It’s always prudent to consult tax professionals to avoid inaccuracies and audits. At Prime Accounting, we provide accounting, human resources, CFO, and tax preparation services to companies in St. Louis, MO. Click here to schedule a strategy session for your 2021 tax payments.