Estimated taxes are simple … in theory.
For salaried employees, estimated tax payments would be fairly simple to calculate, but many small businesses and self-employed persons in the United States can have irregular income, causing slightly larger headaches on Form 1040-ES.
So, the first thing to check on is whether you might be exempted from the quarterly payments in the first place.
You do not need to worry about the rest of this article if you either:
a. Expect to pay less than $1,000 in taxes this year, or
b. Your withholdings and credits will be greater than the amount of taxes you paid last year.
If not, then buckle up and use the following walkthrough to explain some of the more mystifying nomenclature on IRS Form 1040-ES.
How to calculate estimated tax payments – guide to the worksheet
Navigating to the above link will bring you to a pdf of Form 1040-ES. You will see instructions for a few pages and then come upon a self-employment tax worksheet. This is explained in Line 11, below.
Looking just beyond this worksheet, you will find your goal – the estimated tax worksheet.
If you are at a loss for any line, simply find its corresponding number in the list below for a simple explanation:
- Adjusted Gross Income – This can be the most difficult part of the worksheet for many small business owners, or self-employed workers because income is unstable. But there is an additional worksheet for you to fill out.
- Itemized Deductions – If you are unsure about your deductions or will not have many to make, you can use a standard deduction of $5,950 if you are single, $11,900 if married filing jointly, and $8,700 if head of household.
- Exemptions – Explained by the worksheet
- Tax – Explained on worksheet
- Alternate Minimum Tax – Enter 0 if your adjusted gross income is below $51,900 if you are single, $80,800 if married filing jointly or a qualified widower, or $40,400 if married filing singly.
- Credits – You might be able to claim a credit if you a) claim a dependent; b) are elderly or disabled; c) are enrolled in a higher education program; d) are contributing to your retirement savings. Otherwise, write 0.
- Self-employment tax – Employers typically pay half of their employees’ medicare and social security taxes. If you are self-employed, then you need to add these taxes back into your tax obligation. Refer to the self-employed worksheet you filled out for Line 1.
- An additional medicare tax could be levied if your household income is greater than $200,000, but if not, then enter 0.
Once you are done with the worksheet, you will know what your estimated tax payments are for the 2013 fiscal year. These are due on April 15, June 17, September 16 and January 15. Keep in mind: payments are considered paid on time as long as they are postmarked by the due date. And you do not need to make the final payment if you file your 2013 tax return by January 31, 2014, and pay the entire balance due with your return.