Do you know how to calculate estimated tax payments? You owe quarterly payments if you receive any income from which the tax isn’t already withheld (which is most paychecks). Because the IRS will charge fees for underpayment it’s important to pay the correct amount.
Many of our clients use us to help estimate their payments so they don’t overpay or underpay. Tax advisors are very proficient at this and can ensure there are no penalties from calculating incorrectly. However, it’s important to know which method will serve you best.
How to Calculate Your Estimated Tax Payments: 3 Methods
(Similar to: IRS Scams)
1. Prior Year Method
Your first option is to pay the same amount that you did in the prior year (most popular estimating method). At each of the quarterly estimated tax due dates, you can pay 25% of the amount of tax you paid last year. This is a safe harbor estimate, which helps you avoid potential penalties. If your prior-year adjusted gross income is over $150,000, your safe harbor will require 110% of the prior calculate estimated tax payments year tax.
2. Annualized Income Method
Pay 90% of your expected current-year tax, based on annualized earnings. This one is a bit more complicated. We recommend asking your accountant for help calculating this. He/she should also be able to take new legislation or business activities into account. You will still pay 25% of that estimated amount each quarter.
3. Projection Method
90% of your Projected tax. If your books are up to date, you should be able to project the amount of tax you owe for the current quarter. Pay the tax you owe, at the time you owe it. Depending on your bookkeeping, this may be the most accurate way. For seasonal industries, this may be an advantage because you can pay the bulk of your tax when you have the cash available.
(Similar To: Step Up Basis: Real Estate Investment Tax Saving Strategy)
Summary
Depending on what industry you belong to, it may be beneficial to know that some industries have more estimated tax payment options than others. For example, Farmers or Fishermen in the agriculture industry have more estimated tax payment options compared to other agricultural workers.
To avoid year-end surprises, use a CPA to review your payments before using this method. None of the methods above are better than the other. Which method you choose will depend on your industry and business.
How do you make your estimated tax payments? Were you happy with the outcomes?
By Leslie Baker
CPA, Accountant at WHH
