Calculating an Estimated Tax Return

Since the United States has a pay-as-you-go tax system, you must make tax payments on income as it is earned. If you are an employee, your employer regularly withholds taxes out of your pay and provides this to the government. However, if you receive additional income apart from an employer which is not taxed or if you are self-employed, you are responsible for making estimated tax payments throughout the year.

Failing to pay taxes on income that is not automatically withheld – or paying late – may result in penalties for some taxpayers. Most people pay estimated taxes quarterly, but you could also choose to pay weekly or bi-monthly (in advance of the quarter) if that works better for your financial situation.

United States Tax Brackets

The US uses a progressive tax system. Essentially, this means that those who earn more money have to pay more in taxes. How much they have to pay is determined by a “bracket” system. Understanding this basic idea can go a long way toward understanding the tax system as a whole.

As your income increases, so do your taxes. This is the basic premise behind a progressive tax. The tax assumes that those who have more money can contribute more money to the government. One argument that is made in support of a progressive tax system is that individuals who have more than enough money to meet their basic needs have an obligation to make a bigger financial contribution to society.

The amount of taxes that each person pays is based on a percentage of his or her income. Taxpayers at the lowest end of the income spectrum may only have to pay 10 percent of their income in taxes. High-income earners, on the other hand, may have to contribute nearly 40 percent.

A progressive tax is meant to distribute wealth more evenly. Although the plan does not work perfectly, it does have a lot of advantages because it forces those who can afford it to contribute more in taxes.

How to Calculate the Amount Owed

Individuals, including S corporation shareholders, partners, and sole proprietors, typically use Form 1040-ES and its associated worksheet to help determine the amount for their estimated tax payments. To figure out your estimated tax, you must establish your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. The IRS recommends that you use income, deductions, and credits from the prior year as a starting point if that information is available. If you estimate too high or too low, you simply need to complete another Form 1040-ES to recalculate for the following quarter. Accurate estimations will help avoid penalties.

Note that corporations do not use Form 1040-ES to file estimated tax, but rather Form 1120-W. Like 1040-ES, it contains instructions on how to file estimated corporate taxes.

When and How to Pay Estimated Taxes

Typically, estimated tax payments are made quarterly. Though these dates may vary by a day or two due to weekends and holidays, the first quarter’s payments are due on April 15th, the second on June 15th, the third on September 15th, and the fourth on January 15th. If you do not pay enough tax for each payment period, you could be charged a penalty, regardless of whether you are due a refund. Most taxpayers avoid this penalty if they owe less than $1,000 in taxes after subtracting withholding and credits, or if they paid at least 90 percent of the tax for the current year or 100 percent of the tax for the prior year, whichever is smaller.

You can file estimated taxes online using the Electronic Federal Tax Payment System, which allows you to see the history of your payments to determine whether or not you are on track for each quarter. You can also pay by phone or by mail. Form 1040-ES has instructions on how to file using each method. Note that corporations must file electronically – they cannot pay by phone or mail.