How to Calculate Estimated Taxes
I'm married. My husband has a day job (W2), and I am an independent contractor. How do I calculate my estimated taxes. Do I add both our incomes together? Or just use my business income?
Dear Reader,
Calculating your estimated taxes can be really easy, or really hard, depending on your unique tax situation. For a married couple where one person has a W2 and the other is self-employed, here's what I suggest.
First, generate a profit and loss statement each quarter for your business. This will be pretty easy if you use personal finance software or a spreadsheet program to track income and expenses.
Second, find your marginal tax rate. Usually this is located on a summary worksheet provided by your tax accountant or your tax preparation program. You will need to use your marginal tax rate to be sure that you are paying in sufficient tax to avoid owing at the end of the year.
Third, add your marginal tax rate to your self-employment tax rate of 15.3%. So, if you are in the 20% tax bracket, your total tax rate will be 20% plus 15.3% or 35.3% total.
Fourth, multiply your quarterly net profit by this total tax rate. If your net profit was $1,000, then you should make an estimated tax payment of at least $353.
If you make this calculation quarterly, your estimated tax payments should be about right, or perhaps a little overpaid.
Do not add your husband's salary to the equation. He should adjust his taxes withholding using Form W4 withholding statement.
Comments
I have to take issue with one thing in this article. It gives the impression that overpaying on taxes is good, and owing any money at the end of the year is bad. While it’s true that you don’t want to underpay so much that there are additionaly penalties, but why overpay and give the goverment extra money to invest when you could invest that money. As long as you expect to owe a little when you file your taxes, it’s better to have that extra money working for you rather than working for the IRS.