Calculating Your Estimated Tax Payments

If you are required to make estimated tax payments, how much do you have to pay?

Your total tax payments for the 2013 tax year (that is, before January 15^th, 2014--the last quarterly installment of estimated tax) must add up to the lower of these two amounts:

1. 90 percent of the tax you owe for the current year, or
2. 100 percent of the tax you owed for last year. (If your 2013 adjusted gross income was more than $150,000, or more than $75,000 for marrieds filing separately, substitute 110 percent in the preceding sentence.)

"Tax you owe for the year" includes federal income tax and any self-employment (SECA) tax due on your business income.

Financial Calculators Use this Self-employment tax calculator to estimate your SECA taxes.

"Total tax payments" includes any tax withholding on any paychecks, investment income, pensions, or any other income you receive (or your spouse receives, if filing jointly). If the difference between any withholding during the year, and the amount computed in the paragraph above is $1,000 or more, it must be made up with estimated tax payments.

The best way to do this is to:

1. Look at each major item on each tax form and schedule that you filed this year, and make a guess as to whether it will change for next year.
2. If you think there will be a change, estimate what the change will be.
3. Determine how the cumulative changes will affect your tax bill to arrive at a ballpark estimated bill.
4. From this expected tax bill, subtract any amounts that will be withheld.
5. The amount remaining, minus $1,000, is what you need to pay in estimated taxes.

Save Money It is important that you are aware of changes in your estimated tax liability. Many business owners evaluate their liability twice a year: around April 15th and then in the third-quarter of the year. It is also important to reassess your liability if you receive substantially more income or gain from the sale of an asset.

This is important because if you don't pay enough estimated tax on a quarterly basis, you may have to pay a penalty for underpayment - even if you end up getting a refund when you file your return.

The IRS provides a worksheet on which you can make this calculation, as part of the instructions to Form 1040-ES. You can get a copy by calling 1-800-TAX-FORM or going to the IRS website.

Save Money Beginning in 2013, a new 0.9 percent Medicare surtax applies to self-employment income exceeding a threshold amount. The threshold amount is based on filing status ($250,000 for joint return, $125,000 for separate, and $200,000 in any other case) and is coordinated with FICA wages. (The corresponding FICA surcharge is borne entirely by the employee; there is no employer match. Presumably, this is why there is no employer-equivalent deduction for self-employment tax purposes.) If your income is high enough to be subject to this surtax, consider increasing the amount of your estimated tax payments, in order to avoid a penalty come tax time. Your accountant or advisor should be able to help you decide how much to pay. Another consideration is that beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.

Regular or annualized method. Once you know the total amount of estimated tax payments you'll have to make during the year, there are two ways to compute the dollar amount you must pay for each quarter. The two methods generally used are the regular installment method and annualized income installment method.

The regular installment method works by dividing your total amount of estimated payments for the year by four. On each payment due date, you pay one-fourth of the total tax due for the year.

If your business is of the type that doesn't receive income evenly throughout the year (for example, you sell surfboards year-round in the Northeast), you may want to use the annualized income installment method to compute your estimated tax payments for each period. Under this method your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method.

If you elect to use the annualized method, you'll have to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trusts, with your regular individual income tax return. Using this method is more complicated than simply determining your net income for each quarter, and figuring the tax on it. However, the method enables you to avoid a large tax bill during the time of the year when you have a lower cash flow, so it may be worth the extra effort. For complete instructions on using this method, talk to your tax advisor or get a copy of the IRS's free Publication 505, Tax Withholding and Estimated Tax.

Corporations are generally required to make installment payments equal to 25 percent of the required annual estimated tax.