How Much Do I Pay in Estimated Taxes?

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Now that you know whether you need to make estimated tax payments, now let’s move on to how much to pay.  We’ve already said you can use last year’s income tax return to figure out how much estimated taxes to pay during the current year.  You just take the amount and divide by four, and pay every three months.

But what happens if your income suddenly drops or rises during the current year?  If you are making estimated tax payments based on last year’s income then you could end up over or underpaying this year.

For example, if you sell your home during the year your estimated tax payments will go up.  You will have to use the Amended Estimated Tax Worksheet 2-9 to refigure what you owe.  IRS  worksheet 2-9  just takes your new estimated tax amount and divides it up among the remaining quarters of the year.

How to Tell if You Need to Pay Estimated Taxes

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In the tax world, there are two types of income: wages and non wages.  Wage earners are people who work for someone, they get a salary, they are called employees.  Everyone else who has income but not salary falls into the category of those who need to pay estimated taxes.

So if you’re not a wage earner and you receive income, your source of income may be one of the following:

  • alimony
  • stocks sales
  • dividends
  • interest income
  • self-employment income
  • income from a business

All of the above listed types of income are not subject to withholding.  On the other hand, wage earners’ paychecks have withholding…money is taken out for Uncle Sam.  But you have to pay up at some point, and this is where estimated tax payments come in.

Usually estimated tax payments are made quarterly…four times a year.  The objective is not to owe penalties to the IRS when you do your income taxes for the year.  In order to avoid penalties for underpayment of your taxes, use the previous year’s income tax as a guideline.  Unless you expect an enormous jump in your earnings, pay what you paid last year.

There is an option to pay just 90 percent of last year’s taxes, and that’s for people who expect to make less.  But you better be sure because if you don’t pay enough you’ll end up paying an underpayment penalty.

When to Pay Estimated Tax Payments

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Now that you know how to figure the total amount of tax due for the current year, make sure you don’t miss any deadlines.  As with everything concerning the IRS, there will be penalties and fines for missed due dates.

Your total amount due for let’s say 2012 should be divided in quarters, so divide it by four.  You will be making four equal payments spread evenly throughout the year.  The quarters of the year and their due dates are like this:

  • January 1 to March 13: estimated tax payments are due April 15
  • April 1 to May 31: estimated tax payments are due June 15
  • June 1 to August 31: estimated tax payments are due September 15
  • September 1 to December 31: estimated tax payments are due January 15 of the next year

If you are mailing your estimated tax payments then the postmark date is the date of payment.

How to Figure Estimated Tax Payments

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Here’s how to figure your estimated tax payments.  Don’t worry if you’re feeling overwhelmed by the paperwork required form self-employed people- it’s not really as complex as the IRS makes it out to be.

If you’re self-employed this is required four times a year.  There’s a simple worksheet put out by the IRS that helps your figure the payments and it’s called the 1040-ES.  To fill out the worksheet so you can make your 2012 estimated tax payments, gather this list of items:

  1. 2012 Estimated tax worksheet
  2. instructions for the worksheet
  3. 2012 Tax tables
  4. 2011 tax return

Step One

Take your adjusted gross income from your 2011 tax return.  Use this to estimate how much you will make in 2012.  Your expected AGI is the income you expect to earn, minus all the deductions and credits you expect to receive.

Step Two

Subtract from that amount any adjustments.  Take your tax form from 2011 and look on lines 23 to 35.  These are the adjustments you took last year so use them as a guide for 2012.

Step Three

Subtract the itemized deductions or the standard deduction.

Subtract $3,800 for each exemption you have.  Often this is just one personal exemption.

Step Four

Now you have your expected taxable income for 2012.  Use that amount and look it up in the 2012 Tax Rate schedules.  You will pay 90% of that tax amount or you can choose to pay 100% of your 2011 tax.  Divide it by four and there are your 2012 estimated tax payments.  How you know how to figure estimated tax payments.

Estimated Tax Payments for 2011

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Estimated tax payments for 2011 can be used to figure out what you should pay for 2012.  It’s a matter of predicting how much you will make in 2012 so you can estimate how much you should pay the IRS each quarter for your taxes.

Remember: estimated tax payments are for sole proprietors, S corporation shareholders, partners and self employed people.  Since you won’t be getting a regular paycheck from an employer who takes automatically withholds taxes for you, you must do it yourself.  The estimated tax payments are made four times per year.

Figuring your estimated tax payments is a bit like doing your actual taxes.  You have to use your expected income, your taxable income, deductions, credits  and exemptions…just like doing taxes but four times a year!  If you think there is any change in circumstances like earnings going up or down you will have to figure it all out again for the next quarter and make the necessary changes.

There is a worksheet published by the IRS called the Form 1040-ES.  It will show you what to pay based on what you expect to earn and multiplied by a percentage that will give you your 2012 estimated tax payments based on your estimated tax payments for 2011.

What are Estimated Tax Payments?

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Estimated tax payments are payments you have to make to the IRS if money isn’t taken out from a paycheck.   It’s essentially the way you make your own withholding payments instead of having an employer do it.  If you  get a paycheck from your employer, money will be automatically taken out for social security and medicare (FICA).    If you are self-employed, you have to perform the withholding yourself by making estimated tax payments to the IRS.

Social Security taxes aren’t the only type of taxes payed through estimated tax payments.  Income taxes are also covered in these payments if you are self-employed.

Taxpayers who are self-employed aren’t the only people who need to make estimated tax payments.  If you receive alimony, rent, or capital gains or if you have income from interest or dividends you will have to make estimated tax payments.  Other forms of income that may require you to make estimated tax payments are:

  • sale of assets
  • prizes (for example, you win the lottery)
  • awards

If you are getting a paycheck or pension and the withholding amount isn’t enough then you may also have to make estimated tax payments even though you are not self-employed.

Make sure you know the requirements of the IRS’s estimated tax payments system.  If you don’t pay on time each quarter you will be charged penalties by the IRS.  That applies even you don’t end up owing them money when you do your taxes at the end of the year.