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I receive a 1099-Misc each year and that's all. I have to pay estimated taxes, but I don't know how to calculate them for myself.

This is the current estimated tax calendar

From       To       Months   Due
Jan 1      Apr 1    3        Apr 15      <-- Late :(
Apr 1      Jun 1    2        Jun 15      <-- Due soon
Jun 1      Sep 1    3        Sep 15
Sep 1      Jan 1    4        Jan 15

Here are the standard 2016 deductions 1. I am single, so $6,300.

Filing Status            Deduction Amount
Single                   $6,300.00          <---
Married Filing Jointly   $12,600.00
Head of Household        $9,300.00
Personal Exemption       $4,050.00

Here is the Tax Brackets for 2016 1. I am in the 25% bracket

Rate   Single                Married Joint         Head of Household
10%    $0 to $9,275          $0 to $18,550         $0 to $13,250
15%    $9,275 to $37,650     $18,550 to $75,300    $13,250 to $50,400
25%    $37,650 to $91,150    $75,300 to $151,900   $50,400 to $130,150
28%    $91,150 to $190,150   $151,900 to $231,450  $130,150 to $210,800
33%    $190,150 to $413,350  $231,450 to $413,350  $210,800 to $413,350
35%    $413,350 to $415,050  $413,350 to $466,950  $413,350 to $441,000
39.6%  $415,050+             $466,950+             $441,000+

Self employment tax2

Type               Amount       on first $x
Social Security    6.2%         118,500
Medicare           1.45%        All

State Tax.

Look up table for my current state and follow same rules as federal?

My calculation so far

total income to date
X

total months paid so far
M = 5

projected income
P = X / M * 12

standard deduction (single)
D = 6300

adjusted income
A = P-D

estimated income for Q1 (3 months)
Q1i = A/3

estimated federal tax Q1
Q1ft = (10% * 9275) + (15% * (37650-9275)) + (25% * (Q1i-3750))

estimated self-employment tax Q1
Q1se = (6.2% * Q1i) + (1.45% * Q1i)

estimated state tax Q1
Q1st = calculate same as federal using local state rates

Then for Q1 taxes, I should pay this?

Q1 Federal Payment = Q1ft + Q1se
Q1 State Payment   = Q1st

Just to make sure I'm doing calculations correctly, here's Q2

estimated income for Q2 (2 months)
Q2i = A/2

estimated federal tax Q2
Q2ft = (10% * 9275) + (15% * (37650-9275)) + (25% * (Q2i-3750))

estimated self-employment tax Q2
Q2se = (6.2% * Q2i) + (1.45% * Q2i)

estimated state tax Q2
Q2st = calculate same as federal using local state rates

---

Q2 Federal Payment = Q1ft + Q1se
Q2 State Payment   = Q1st

  • Am I calculating self-employment tax correctly?
  • Does self-employment tax get added to my federal estimate? or state? or both?
  • Is there anything else I'm overlooking?

†: I also receive a 1098-E for student loan interest paid, so that would just be added to my deductions, right?

  • State income tax rules vary widely from state to state. Which state are you in? – Ben Miller Jun 2 '16 at 4:22
  • @BenMiller 1098-E, sorry that was a typo. – user14071 Jun 2 '16 at 5:05
6

There is a shortcut you can use when calculating federal estimated taxes. Some states may allow the same type of estimation, but I know at least one (my own--Illinois) that does not.

The shortcut: you can completely base your estimated taxes for this year on last year's tax return and avoid any underpayment penalty. A quick summary can be found here (emphasis mine):

If your prior year Adjusted Gross Income was $150,000 or less, then you can avoid a penalty if you pay either 90 percent of this year's income tax liability or 100 percent of your income tax liability from last year (dividing what you paid last year into four quarterly payments). This rule helps if you have a big spike in income one year, say, because you sell an investment for a huge gain or win the lottery. If wage withholding for the year equals the amount of tax you owed in the previous year, then you wouldn't need to pay estimated taxes, no matter how much extra tax you owe on your windfall.

Note that this does not mean you will not owe money when you file your return next April; this shortcut ensures that you pay at least the minimum allowed to avoid penalty.

You can see this for yourself by filling out the worksheet on form 1040ES. Line 14a is what your expected tax this year will be, based on your estimated income. Line 14b is your total tax from last year, possibly with some other modifications. Line 14c then asks you to take the lesser of the two numbers. So even if your expected tax this year is one million dollars, you can still base your estimated payments on last year's tax.

  • That's also very interesting. I did get some prepaid stubs on my last year's return but I wasn't sure how applicable they'd be if my income changed. So far it looks like I'll make 20% more this year, so I thought I'd have to increase my estimated payments. Thanks for the info! – user14071 Jun 2 '16 at 13:46
3
Q1i = A/3

This is wrong. It should be

Q1i = A * 3 / 12 

or

Q1i = A / 4

Now, to get back to self-employment tax. Self-employment tax is weird. It's a business tax. From the IRS perspective, any self-employed person is a business. So, take your income X and divide by 1.0765 (6.2% Social Security and 1.45% Medicare). This gives your personal income. Now, to calculate the tax that you have to pay, multiply that by .153 (since you have to pay both the worker and employer shares of the tax).

So new calculation

Q1pi = Q1i / 1.0765

or they actually let you do

Q1pi = Q1i * .9235

which is better for you (smaller).

And your other calculations change apace.

Q1ft = (10% * 9275) + (15% * (37650-9275)) + (25% * (Q1pi-3750))
Q1se = (6.2% * Q1pi) + (1.45% * Q1pi) + (6.2% * Q1pi) + (1.45% * Q1pi)

And like I said, you can simplify Q1se to

Q1se = Q1pi * .153

and your payment would be

payment1 = Q1ft + Q1se

Now, to get to the second quarter. Like I said, I'd calculate the income through the second quarter. So recalculate A based on your new numbers and use that to calculate Q2i.

Q2i = A * (3 + 3) / 12

or

Q2i = A / 2

Note that this includes income from both the first and second quarters. We'll reduce to just the second quarter later. This also has you paying for all of June even though you may not have been paid when you make the withholding payment. That's what they want you to do.

Q2ft = (10% * 9275) + (15% * (37650-9275)) + (25% * (Q2pi-3750))
Q2se = Q2pi * .153

But we aren't done yet. Your actual payment should be

payment2 = Q2ft - Q1ft + Q2se - Q1se

or

payment2 = Q2ft + Q2se - payment1

Because Q2ft and Q2se are what you owe for the year so far. Q1ft + Q1se is what you've already paid. So you subtract those from what you need to pay in the second quarter. In future quarters, this would be

Q3i = A * 3 / 4
payment3 = Q3ft + Q3se - payment2 - payment1
Q4i = A
payment4 = Q4ft + Q4se - payment3 - payment2 - payment1

All that said, don't stress about it. As a practical matter, so long as you don't owe $1000 or more when you file your actual tax return, they aren't going to care. So just make sure that your total payments match by the payment you make January 15th.

I'm not going to try to calculate for the state. For one thing, I don't know if your state uses Q1i or Q1pi as its base. Different states may have different rules on that. If you can't figure it out, just use Q1i, as that's the bigger one. Fix it when you file your annual return. The difference in withholding is going to be relatively small anyway, less than 1% of your income.

  • This was the clearest explanation of self-employment tax calculation I've seen. Thank you so much – user14071 Jun 2 '16 at 5:17
  • The payment3 and payment4 formulas were very helpful as well – user14071 Jun 2 '16 at 5:26
0

There are a couple of things that are missing from your estimate.

  • In addition to your standard deduction, you also have a personal exemption of $4050. So "D" in your calculation should be $6300 + $4050 = $10,350.

  • As a self-employed individual, you need to pay both the employee and employer side of the Social Security and Medicare taxes. Instead of 6.2% + 1.45%, you need to pay (6.2% + 1.45%) * 2 = 15.3% self-employment tax.

In addition, there are some problems with your calculation.

Q1i (Quarter 1 estimated income) should be your adjusted annual income divided by 4, not 3 (A/4).

Likewise, you should estimate your quarterly tax by estimating your income for the whole year, then dividing by 4. So Aft (Annual estimated federal tax) should be:

Aft = (10% * 9275)  +  (15% * (37650 - 9275))  +  (25% * (A - 37650))

Quarterly estimated federal tax would be: Qft = Aft / 4

Annual estimated self-employment tax is: Ase = 15.3% * A

with the quarterly self-employment tax being one-fourth of that: Qse = Ase / 4

Self employment tax gets added on to your federal income tax. So when you send in your quarterly payment using Form 1040-ES, you should send in Qft + Qse.

The Form 1040-ES instructions (PDF) comes with the "2016 Estimated Tax Worksheet" that walks you through these calculations.

  • Thanks for catching the $4050 personal exemption. I see that on my previous years' tax forms and that brings my spreadsheet calculations a lot closer to the amounts I actually owed. Why did you choose A/4 for the estimated income? I'm only counting 3 months in the first quarter? – user14071 Jun 2 '16 at 5:19
  • @naomik There are 4 three-month periods in the year. Think of it like this: Annual income / 12 = Monthly income. Monthly income * 3 = Quarterly income. – Ben Miller Jun 2 '16 at 5:25
  • /me smacks head. I got my lines cross there. That's probably easier to to treat all quarters as 3 months instead of basing it on the estimated tax calendar's "quarters" (that are not 3 months each). – user14071 Jun 2 '16 at 5:29
0

One way to do these sorts of calculations is to use the spreadsheet version of IRS form 1040 available here. This is provided by a private individual and is not an official IRS tool, but in practice it is usually accurate enough for these purposes. You may have to spend some time figuring out where to enter the info. However, if you enter your self-employment income on Schedule C, this spreadsheet will calculate the self-employment tax as well as the income tax. An advantage is that it is the full 1040, so you can also select the standard deduction and the number of exemptions you are entitled to, enter ordinary W-2 income, even capital gains, etc.

Of course you can also make use of other tax software to do this, but in my experience the "Excel 1040" is more convenient, as most websites and tax-prep software tend to be structured in a linear fashion and are more cumbersome to update in an ad-hoc way for purposes like tax estimation. You can do whatever works for you, but I would recommend taking a look at the Excel 1040. It is a surprisingly useful tool.

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