The important thing to remember with quarterly estimated taxes is that they are estimates. If you make more or less income than you anticipated, you can adjust your estimates for the next quarter. In addition, if you have questions or want help creating a more accurate tax projection, schedule a call with your dedicated tax accountant.
Federal Estimated Taxes
To calculate your federal estimated tax, you can use one of two methods:
1. Estimated Income Method:
To use this method, estimate your net income for the quarter, then multiply that by your estimated tax rate. If you are not sure what rate to use, 20% to 25% is usually a good estimate.
Estimated Quarterly Taxes = *Net Income x .20
If you want to get even more precise, the IRS also provides an Estimated Tax Worksheet on form 1040-ES to help you calculate your taxes.
*Your net income is your revenue minus any business expenses. Our team will provide this information for you on your income statement. Be sure to send us your bank statements regularly so we can keep this as accurate and up-to-date as possible.
2. Prior Year's Tax Method:
If your income varies, you can base your estimated taxes on the prior year's tax. You'll generally be safe from underpayment penalties if you pay at least 100% of your prior year's tax (110% if your income exceeds $150,000).
State Estimated Taxes
Similar to federal estimated taxes, calculate your state taxable income and apply the state tax rate to determine your state tax liability.
Each state has its own tax laws and requirements for estimated tax payments. Check with your state's Department of Revenue or taxation authority to understand the specific rules, deadlines, and forms required for state estimated tax payments.