How to Calculate EstimatedTaxes Like a Pro

Estimated taxes are periodic tax payments that individuals and businesses make to the government throughout the year, typically on income that is not subject to withholding tax. This type of income may include money made through self-employment, rental income, interest, dividends, or other sources where taxes are not automatically withheld. Additionally, if you expect to owe at least $1,000 in taxes after subtracting withholding and refundable credits on your income that has already had tax withheld you may need to make estimated tax payments.

Here's a general guide on how to calculate and pay estimated taxes:

1. Estimate Your Annual Income: Project your total income for the year. This includes income from self-employment, rental income, capital gains, dividends, interest, and any other sources.

2. Calculate Your Tax Liability: Estimate your total tax liability for the year. This includes income tax as well as any self-employment tax or other taxes (i.e., capital gains) that may apply to your situation.

3. Determine Withholding and Credits:  Subtract any tax withholding from your paychecks, as well as any tax credits (i.e., education credits) you expect to claim.

4. Use Form 1040-ES: The IRS provides Form 1040-ES, which is a worksheet to help you calculate your estimated tax liability. The form includes instructions on how to estimate your income, deductions, and credits.

5. Calculate Quarterly Payments: Based on your estimated annual tax liability, divide that amount by four to determine your quarterly payments. The due dates for estimated tax payments are generally in April, June, September, and January of the following year.

6. Make Payments: You can make estimated tax payments using IRS Form 1040-ES and mail a check, use the Electronic Federal Tax Payment System (EFTPS), or pay online through the IRS website. I advise using the EFTPS or paying online through the IRS website. Both ways are better in terms of tracking and safety than sending a check. 

It's important to note that failure to pay enough in estimated taxes may result in penalties and interest. It's advisable to review your estimated tax payments periodically and adjust them as needed, especially if your income or financial situation changes throughout the year. I, personally, review my estimated tax needs the week before each quarter payment is due.  If you're unsure about your specific tax situation, consult with a tax professional. The upfront cost of meeting with a tax professional can be a great deal less expensive than penalties and interest.