Estimated Taxes

Example of an Estimated Tax Calculation

Here's an example of a estimated tax projection for an independent contractor. To run this projection, you'll need to know your income and deductions for the year so far, and then develop a little spreadsheet to multiply those figures into an annual amount.

Sample Estimated Tax Calculation

Shelley is an independent contractor, which is her sole source of income. For the first six months of the year, she had $50,000 of self-employment income and $12,500 of business expenses, resulting in a net profit of $37,500. Her business isn't very seasonal, so it would be a safe assumption that her net profit for the full year will be about $75,000. This income will be subject to both the regular income tax and the self-employment tax. So here's how the tax calculations would work:

Self-employment tax ($75,000 x 0.9235 x 15.3%) = 10,597
Deduction for half of the self-employment tax = 5,299
Standard deduction for a single person = 5,450
Personal exemption for herself = 3,500
Taxable income (75,000 - 5,299 - 5,450 - 3,500) = 60,751

We'll calculate the income tax using the 2008 tax rates for this example. Her tax is estimated to be $11,531. This plus her self-employment tax of $10,597 equals how much she needs to pay in this year: $22,128. In order to avoid the estimated tax penalty, this contractor will need to pay in at least 90% of this amount. However, I typically recommend that people pay the full amount of the tax to prevent from owing at tax time. For this contractor, she should be paying about $5,532 quarterly to ensure that her taxes are fully paid.

I recommend saving all your calculations in a spreadsheet program. That way, you'll be able to run reports at different times of the year and adjust your estimated payments accordingly. This will be 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.