Pay your income tax in 4 installments: Estimated Tax

How to Calculate Your Estimated Tax for 2022 and 2023

Are you self-employed, a freelancer, or an independent contractor? If so, you probably need to pay estimated taxes every quarter. Estimated taxes are a way of paying your income tax and self-employment tax throughout the year, instead of waiting until April 15th. In this article, we’ll explain what estimated taxes are, who needs to pay them, how to calculate them, and how to make your payments on time.

Here’s what we’ll cover:

• What are estimated taxes?
• Who needs to pay estimated taxes?
• How to calculate estimated taxes
• How to make estimated tax payments
• What happens if you don’t pay estimated taxes?

What are estimated taxes?

Estimated taxes are periodic payments of income tax and self-employment tax that you make to the IRS during the year. Unlike employees who have taxes withheld from their paychecks, self-employed individuals and other taxpayers who receive income that is not subject to withholding have to pay their taxes themselves.

Estimated taxes are based on your expected income, deductions, and credits for the year. You can use Form 1040-ES, Estimated Tax for Individuals, to figure out how much you owe each quarter. You can also use online tools like NerdWallet’s Tax Calculator or Bench’s Estimated Tax Payments Calculator to estimate your tax liability.

Who needs to pay estimated taxes?

According to the IRS, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return. This applies to individuals, sole proprietors, partners, and S corporation shareholders who receive income from sources such as:

• Self-employment
• Interest
• Dividends
• Alimony
• Rent
• Royalties
• Capital gains
• Prizes and awards

You don’t have to pay estimated tax for the current year if you meet all three of the following conditions:

• You had no tax liability for the prior year
• You were a U.S. citizen or resident alien for the whole year
• Your prior tax year covered a 12-month period

How to calculate estimated taxes

To calculate your estimated taxes, you need to estimate your adjusted gross income, taxable income, taxes, deductions, and credits for the year. You can use your prior year’s tax return as a starting point, but make sure to adjust for any changes in your income or expenses.

Here are the basic steps to follow:

1. Determine your expected income for the year. Include all sources of income that are not subject to withholding, such as self-employment income, interest, dividends, etc.
2. Deduct any expenses that are related to your income, such as business expenses, alimony payments, IRA contributions, etc. This will give you your adjusted gross income (AGI).
3. Deduct either the standard deduction or your itemized deductions from your AGI. The standard deduction for 2022 is $12,950 for single filers and $25,900 for married couples filing jointly. Itemized deductions include things like mortgage interest, state and local taxes, charitable contributions, etc.
4. This will give you your taxable income. Apply the appropriate tax rate to your taxable income according to the 2022 tax tables. This will give you your income tax liability.
5. Add any other taxes that you may owe, such as self-employment tax, alternative minimum tax, net investment income tax, etc. This will give you your total tax liability.
6. Subtract any credits that you may qualify for, such as the child tax credit, the earned income credit, the American opportunity credit, etc. This will give you your net tax liability.
7. Divide your net tax liability by four to get your estimated tax payment for each quarter.

For example, let’s say Stephanie is a freelance graphic designer who expects to earn $60,000 in 2022. She has no other income and no dependents. She contributes $6,000 to a traditional IRA and has $10,000 in business expenses. She takes the standard deduction and has no credits. Here’s how she would calculate her estimated taxes:

• Her expected income for the year is $60,000.
• She deducts her IRA contribution and her business expenses from her income, which gives her an AGI of $44,000.
• She deducts the standard deduction of $12,950 from her AGI, which gives her a taxable income of $31,050.
• She applies the 2022 tax rate of 12% to her taxable income, which gives her an income tax liability of $3,726.
• She also owes self-employment tax of 15.3% on 92.35% of her net self-employment income ($60,000 – $10,000), which gives her a self-employment tax liability of $7,065.
• She adds her income tax and self-employment tax liabilities, which gives her a total tax liability of $10,791.
• She has no credits, so her net tax liability is also $10,791.
• She divides her net tax liability by four to get her estimated tax payment for each quarter, which is $2,698.

How to make estimated tax payments

You can make your estimated tax payments online, by phone, or by mail. You can use the IRS Direct Pay service to pay directly from your bank account. You can also use a credit or debit card through one of the IRS-approved payment processors, but you may have to pay a fee. If you prefer to pay by phone or mail, you can use the payment vouchers included in Form 1040-ES.

The due dates for estimated tax payments are usually April 15th, June 15th, September 15th, and January 15th of the following year. However, if the due date falls on a weekend or a holiday, the payment is due on the next business day. For 2022 and 2023, the due dates are:

What happens if you don’t pay estimated taxes?

Paying estimated taxes is not optional. If you skip or underpay your quarterly payments, you could face a penalty from the IRS. The penalty is based on how much you owe and how long you owe it. The IRS charges interest on the unpaid amount, which changes every quarter. The penalty may be waived if:

• Your tax balance is less than $1,000 after subtracting your withholding and credits.
• You paid at least 90% of the tax for the current year or 100% of the tax for the previous year, whichever is smaller.
• You had a valid reason for not paying enough, such as a casualty, disaster, or other unusual circumstance.

To avoid the penalty, you should pay as much as you can by the due dates. You can also adjust your payments throughout the year if your income or expenses change. You can use Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty and how to calculate it.

We hope this article helped you understand how to calculate and pay your estimated taxes for 2022 and 2023. Remember, estimated taxes are not a substitute for filing your annual tax return. You still need to report your income and expenses, claim your deductions and credits, and pay any additional tax or request a refund by April 15th of the following year. If you need help with your taxes, you can consult a tax professional or use online software to prepare and file your return.