Sample Estimated Tax CalculationShelley is an independent contractor, which is her sole source of income. For the first three months of the year, she had $25,000 of self-employment income and $7,500 of business expenses, resulting in a net profit of $17,500. Her business isn't very seasonal, so it would be a safe assumption that her income and expenses for the next nine months of the year will be similar. To project her income for the year, we need to multiply her income by a ratio. Since we have income for first three months of the year, this income represents 3/12ths or one-fourth of her annual income. To project her income for the full year, we need to multiply by the inverse or reciprocal ratio. The reciprocal of 3/12ths is 12/3rds, which is the same as saying that the reciprocal of one-fourth is four. Multiplying our year-to-date figures by the reciprocal results income that is projected to be 100% of the full year. Multiplying Shelley's net profits of $17,500 (for the first three months) by the reciprocal ratio (12/3rds), we find that $70,000 is what we expect Shelley's net profit for the full year to be.
Now that we've found a full year's worth of net profit, we can begin a tax calculation. Shelley's business income for the year will be about $70,000. As an independent contractor, Shelley's income will be subject to both the income tax and the self-employment tax. So here's how the tax calculations would work:
Self-employment tax ($70,000 x 0.9235 x 15.3%) = 9,890.69Now that we've found Shelley's taxable income for the year, we can calculate her income tax using the 2013 tax rates for this example. As a single person, Shelley's income tax is estimated to be $9,692.50. This plus her self-employment tax of $9,890.69 equals how much she needs to pay in this year: $19,583.19. In order to avoid the estimated tax penalty, Shelley would need to pay in at least 90% of this amount. However, Shelley might also want to pay the full amount of the tax to prevent from owing at tax time. If she wanted to pay in 90% of her current tax, Shelley would take the tax amount, multiply by 90%, and then divide by four to find each of her four estimated payments, or about $4,406 each. If Shelley wanted to pay 100% of her tax, we would take the tax amount and divide by four to find each of her four estimated payments, or about $4,896 each.
Deduction for half of the self-employment tax = 4,945.34
Standard deduction for a single person = 6,100
Personal exemption for herself = 3,900
Taxable income (70,000 - 4,945 - 6,100 - 3,900) = 50,055
I recommend saving all your calculations in a spreadsheet program. That way, you'll be able to run new calculations at different times of the year and adjust your estimated payments accordingly. This is especially helpful for people with seasonal income. And the spreadsheet can be further used as a planning tool to see how much savings can be achieved through various tax deductions and credits.