Avoid IRS penalties by learning to calculate and pay taxes throughout the year.
This is pretty advanced stuff. This article will help you understand how tax preparers calculate your estimated taxes by explaining what estimated taxes are, how to calculate them, and how to pay them. My lawyer wanted me to tell you that this is not to be construed as tax advice. Every situation is unique. It is impossible to create a guide that will consider every variation. For a truly tailored accounting of how much tax you owe, please make an appointment by booking here. I provide a spreadsheet calculator you can use to calculate estimated taxes. I am not endorsing this resource; use it at your own risk.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES, to figure estimated tax.
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay an underpayment penalty and interest. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits.
What are Estimated Taxes
If you earn a wage reported on a W-2, your employer withholds taxes and sends them to the IRS on your behalf. For those of us who have ventured into the brave world of contracting our work (1099’s) or business ownership, we must calculate taxes and remit them to the IRS.
How To Calculate Estimated Taxes
You have 2 options to determine how much to pay in estimated taxes and avoid penalties.
Option 1:
Pay 100% of your prior year's tax liability. Anyone who earns more than $150,000 per year married filing jointly or $75,000 per year single is considered a high earner and must pay 110% of the prior year's tax.
See line 24 of your form 1040 on last year’s tax return to determine the prior year's tax. Line 24 was your total tax for last year. Pay 100% of last year’s tax or 110% if you are considered a high earner.
Option 2:
Pay 90% of the current year's tax owed. The next 4 steps will guide you in determining the current year’s tax.
Step 1: Estimate your total income for the year.
Calculate your total income. A good place to start for this step is looking at your most recently filed tax return, page 1, the income section. Common examples of income include:
Social Security
1099
W-2
Brokerage income
IRA distribution
Retirement Income
Interest Income
If you recently started a business, started a new job, or quit your job, these events can significantly alter your income. In this case, ask yourself questions like:
Did my W-2 go up or down?
Did I make money in a side business?
Did I take any taxable retirement account distributions?
Step 2: Calculate your expected taxable income.
The difference between your total income and your taxable income is the adjustments the IRS allows. The standard deduction is the free deduction the IRS gives you before taxing your income. The standard deduction for 2024 is $14,600 for single filers, $21,900 for head of household, and $29,200 for joint filers.
Itemized deductions are also available to those whose qualified expenses exceed the standard deduction. Since the Tax Cuts and Jobs Act increased the standard deduction, a majority of filers use the standard deduction. Some situations, such as high medical costs or extraordinary charitable contributions, may warrant using the itemized deduction. Please get in touch with us for an itemized deduction calculation.
Step 3: Determine your tax liability
How much tax will you owe? The 2024 tax rates are as follows:
Tax rate | Single | Married filing jointly | Married filing separately | Head of household |
10% | $0 to $11,600 | $0 to $23,200 | $0 to $11,600 | $0 to $16,550 |
12% | $11,601 to $47,150 | $23,201 to $94,300 | $11,601 to $47,150 | $16,551 to $63,100 |
22% | $47,151 to $100,525 | $94,301 to $201,050 | $47,151 to $100,525 | $63,101 to $100,500 |
24% | $100,526 to $191,950 | $201,051 to $383,900 | $100,526 to $191,950 | $100,501 to $191,950 |
32% | $191,951 to $243,725 | $383,901 to $487,450 | $191,951 to $243,725 | $191,951 to $243,700 |
35% | $243,726 to $609,350 | $487,451 to $731,200 | $243,726 to $365,600 | $243,701 to $609,350 |
37% | $609,351 or more | $731,201 or more | $365,601 or more | $609,351 or more |
Remember that tax rates are incremental. If you made $100,000, you are not taxed ($100,000 – standard deduction) x tax rate. Rather, you pay tax on a step-up basis. Please find the table below that corresponds to your filing status for guidance on calculating your tax liability.
Single
Tax rate | Taxable income bracket | Taxes owed |
10% | $0 to $11,925. | 10% of taxable income. |
12% | $11,926 to $48,475. | $1,192.50 plus 12% of the amount over $11,925. |
22% | $48,476 to $103,350. | $5,578.50 plus 22% of the amount over $48,475. |
24% | $103,351 to $197,300. | $17,651 plus 24% of the amount over $103,350. |
32% | $197,301 to $250,525. | $40,199 plus 32% of the amount over $197,300. |
35% | $250,526 to $626,350. | $57,231 plus 35% of the amount over $250,525. |
37% | $626,351 or more. | $188,769.75 plus 37% of the amount over $626,350. |
Head of Household
Tax rate | Taxable income bracket | Tax owed |
10% | $0 to $17,000. | 10% of taxable income. |
12% | $17,001 to $64,850. | $1,700 plus 12% of the amount over $17,000. |
22% | $64,851 to $103,350. | $7,442 plus 22% of the amount over $64,850. |
24% | $103,351 to $197,300. | $15,912 plus 24% of the amount over $103,350. |
32% | $197,301 to $250,500. | $38,460 plus 32% of the amount over $197,300. |
35% | $250,501 to $626,350. | $55,484 plus 35% of the amount over $250,500. |
37% | $626,351 or more. | $187,031.50 plus 37% of the amount over $626,350. |
Married Filing Jointly
Tax rate | Taxable income bracket | Taxes owed |
10% | $0 to $23,200. | 10% of taxable income. |
12% | $23,201 to $94,300. | $2,320 plus 12% of the amount over $23,200. |
22% | $94,301 to $201,050. | $10,852 plus 22% of the amount over $94,300. |
24% | $201,051 to $383,900. | $34,337 plus 24% of the amount over $201,050. |
32% | $383,901 to $487,450. | $78,221 plus 32% of the amount over $383,900. |
35% | $487,451 to $731,200. | $111,357 plus 35% of the amount over $487,450. |
37% | $731,201 or more. | $196,669.50 + 37% of the amount over $731,200. |
Next, look at page 2 of the 1040 to calculate the additional taxes you were assessed last year. A common additional tax for small business owners is self-employment tax, which is social security and Medicare tax for individuals who work for themselves. This amount is 15.3% and is in addition to income taxes.
Add up income tax, self-employment tax, and other additional taxes to find your total tax liability.
Step 4: Subtract tax withholding or credits
Schedule 3 of the prior tax year’s 1040 is the best starting point for determining what credits you may be eligible for this year. The credits you were eligible for will be listed on schedule 3. Some common credits are the child tax credits, American opportunity credit, and earned income tax credit. Then, you must determine if you are still eligible for the same credits this year. For example, you may have a child who turned 17 and is no longer eligible for the child tax credit.
Add up all the credits you are eligible for plus any tax withholding. Withholding is tax that you already paid during the year. The most common withholding is when an employer takes taxes from your paycheck.
When you have a total number of credits and taxes paid, subtract this number from the tax liability calculated in step 3.
Step 4 should have rendered you your tax liability for this year. Now, divide that total tax amount into 4 equal parts. That will be your estimated quarterly tax payment amount.
If you are a business, keep a running tally of your earnings and remit the tax calculation quarterly based on how much you earned in that quarter.
How to pay estimated taxes
The IRS requires that you make tax payments throughout the year. If you are self-employed, own a business, or suspect that your w-2 withholding will not cover 90% of current year tax or 100% – 110% of the prior year tax, the due dates for estimated taxes are:
Quarter | Payment Period | Due Date |
Q1 | January 1 – March 31 | April 15 |
Q2 | April 1 – May 31 | June 15 |
Q3 | June 1 – August 31 | September 15 |
Q4 | September 1 – December 31 | January 15* of the following year. *See January payment in Chapter 2 of Publication 505, Tax Withholding and Estimated Tax |
| Farmers and Fishermen | See Chapter 2 of Publication 505 |
Note: If the due date for making an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that's not a Saturday, Sunday, or legal holiday.
To pay your estimated taxes, use the online service. You must have an account with the IRS to make payments through the (EFTPS). You can find all payment options by visiting https://www.irs.gov/payments
Important tips
When submitting quarterly payments, ensure you’re submitting for the current calendar year.
Make sure to save the payment confirmation after you have submitted your quarterly tax payment.
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