3 Easy Steps to Calculating Estimated Tax Payments

If you’ve paid estimated taxes in the past, you probably understand that determining the right payment can vary from an extremely time consuming detailed analysis to a simple guess. Below is a 3-step method to quickly determine a reasonable estimate of your quarterly estimated tax payments.

Step 1: Determine your effective tax rate based on last year’s tax return. Simply divide your income from last year by the amount of taxes paid. For example, if John Doe’s income was $80,000 and paid $17,000 in taxes, his effective tax rate was $17,000/$80,000 = 21.25%. If you made significantly more or less income this year than last year, you may want to adjust this percentage. A fair rule of thumb is to add (or subtract) 1-2% per $5,000 increase (or decrease) in income this year as compared to last year.

Step 2: Multiply this year’s income by last year’s effective tax rate. This will provide an estimate of total taxes that will be paid this year, which will be used to estimate your quarterly tax payments. To continue our example, if John made $90,000 this year, his total estimated tax liability would be $90,000 * 21.25% = $19,125. If the IRS is already getting a piece of your income through withholdings, you should remove that amount from this year’s estimate calculated in Step 2. Since John works for himself, he has no IRS withholdings.

Step 3: Divide your total estimated tax by 4 to determine your quarterly payment, and this will be your quarterly estimated tax payment. For John, this amount is $19,125/4 = $4781. Now, John can simply use Easy Estimated Taxes to submit his quarterly estimated tax payments online.

That’s it, follow those three simple steps and you’re done! You may want to repeat this exercise quarterly and make any adjustments along the way to ensure your quarterly estimated tax payments stay accurate throughout the year.
 
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