Small business owners (and about 10% of nannies) know the dates April 15th, June 15th, September 15th, and January 15th all too well. Those are the dates when estimated taxes are due. If you run a business, you must pay the federal and state governments the taxes you estimate you owe for the previous period.
Well, September 15th is just a few days away (actually, since the 15th is a Sunday, estimated tax payments are due by Monday, September 16th this year), so it’s time to calculate and send in payments.
How To Calculate Estimated Tax Payments
I try and make the process as simple as possible by taking the highest tax bracket I’ll be in in a given year and multiplying that my net income for the last period. September’s payment covers June, July, and August, so if there was a combined income of $10,000 and I was in the 25% tax bracket, I wouldn’t just send in a $2,500 payment to the federal government, I’d tack on another 2.9% for Medicare taxes and an additional 12.4% for Social Security taxes. These taxes are fully covered by you since you are both the employer and the employee (typically, an employee pays half of it, 7.65%, while the employer pays the other half). Add it all up and it comes out to a whopping 40.3%! Wow, that’s a lot! The one break you get is that only the first $113,700 of income is subject to Social Security taxes, so if you have already reached that (congratulations), you can avoid that 12.4% tax for this round of estimated tax payments.
But wait, there’s more! You also have to make state estimated tax payments. In California, for couples, income over $74,010 is taxed at a rate of 8% and income over $93,352 is taxed at a 9.3% rate. In this example, let’s use the flat 8% rate to make things simple.
Tally it all up and you get 25% + 15.3% + 8% = 48.3%
While running a business sounds great, that’s a whole lot of the money you just earned going to state and federal taxes. And unlike as an employee where the taxes are taken out of your paycheck before you even see it, you’ve got to take that money out of your bank account and send it to the governments.
How Do You Make Estimated Tax Payments?
Each state has their own system, but the federal tax payment system just happens to be the easiest part of taxes. You simply enroll once, and then log in and make payments when they’re due. You can schedule payments and view your history. Just make sure to have enough money in your checking account when you schedule your payments!
What Happens if You Don’t Make Estimated Tax Payments?
Like with everything else, there are penalties for not paying your tax on time. You can avoid penalties in 3 ways:
- Owe less than $1,000 in tax at the end of the year
- Pay at least 90% of the tax for the current year
- Pay at least 100% of the amount you paid in taxes for the prior year
If you don’t fit one of these, you will likely owe additional tax at the end of the year. The penalty for underpayment of estimated tax is rather complicated, hopefully none of us have the need to use that document to calculate it for ourselves.