How to calculate quarterly estimated taxes

Who needs to pay

You generally need to make estimated payments if you expect to owe at least $1,000 in federal tax after subtracting withholding and credits, and your withholding and credits will be less than the lesser of 90 percent of this year's tax or 100 percent of last year's tax. This commonly applies to freelancers, sole proprietors, partners, S corporation owners with pass-through income, landlords, and people with large investment income.

The four due dates

• April 15 for income earned January through March
• June 15 for April and May
• September 15 for June through August
• January 15 of the next year for September through December

Method 1: The safe harbor (easiest)

You avoid the underpayment penalty if you pay in at least:

• 100 percent of last year's total tax, split into four equal payments, or
• 110 percent of last year's tax if last year's adjusted gross income was above $150,000 ($75,000 if married filing separately), or
• 90 percent of this year's tax, which needs a good forecast.

The safe harbor based on last year's return is the favorite of people with uneven income because the number is known on day one.

Method 2: Estimate this year's tax

1. Project your net profit. Estimated gross income minus business expenses.
2. Compute self-employment tax. Multiply net profit by 92.35 percent, then apply 15.3 percent (12.4 percent Social Security up to the annual wage base, plus 2.9 percent Medicare). Higher earners may owe an additional Medicare tax.
3. Subtract half of the self-employment tax from your income. This is an adjustment on your return.
4. Subtract the standard deduction (or itemized deductions) and, if you qualify, the qualified business income deduction of up to 20 percent.
5. Apply the tax brackets for your filing status to the taxable income.
6. Add self-employment tax, subtract credits and any withholding from a job or spouse, and divide the remainder by four.

An example

Suppose a freelancer expects $80,000 of net profit. Self-employment tax is about 15.3 percent of 92.35 percent of $80,000, or roughly $11,300. After the standard deduction, half of the self-employment tax and the QBI deduction, income tax is a separate figure that depends on filing status. Add the two, divide by four, and that is each quarterly payment. This example is only for illustration: use your own numbers.

Uneven income

If most of your income arrives late in the year, the annualized income installment method can lower early payments and avoid penalties. It takes more calculation, which is where software or a preparer helps.

How to pay

• IRS Direct Pay or your IRS online account (free, from your bank account)
• EFTPS, the federal tax payment system
• Debit or credit card through an IRS-approved processor (fees apply)
• Mail a check with Form 1040-ES

Habits that make it painless

• Open a separate savings account for taxes and move a fixed percentage of every deposit into it, commonly 25 to 30 percent for many freelancers, adjusted to your situation.
• Recalculate after any big change in income.
• Record every payment you make, including the date and amount, so your return gets the full credit.

This article is general education, not tax advice. Rates, limits and deadlines change, so confirm current figures with the IRS or a tax professional. Ledger organizes information and prepares it for review. Estimates depend on the information you enter, so review tax information with a qualified professional.