Why does the IRS require estimated taxes?
Taxes must be paid as you earn or receive income during the year. When you are an employee, your employer submits your tax withholding regularly to the IRS. If you receive income from the following sources, you do not have anyone submitting your tax withholding to the IRS for you, so the IRS expects the withholding to be paid through these estimated tax payments.
*Self-employment
*Interest or dividends
*Capital Gains
*Prizes and Awards
*Alimony
*Other income that does not have withholding taken out
How do you know how much to pay in estimated taxes?
To calculate your estimated taxes, you will need to add up your total tax liability for the current year including individual income tax, self-employment tax and any other taxes. You calculate this tax liability off the amount of income you earn.
Income is taxed according to a tiered percentage based on a range of income amounts which can be called your tax bracket. This is where you need to look up the current tax brackets for the year you plan on making estimated tax payments. These tax brackets adjust every year, so make sure you are calculating your tax based off the correct tax rates. This is how you calculate your individual income tax liability.
For example, let’s look at the below chart that shows the 2025 tax brackets.
If you were a single person filing single on your tax return and earned an income of $80,000, then your tax rate would be 22% because your income falls between the income range of $48,475 to $103,350.
Luckily, the $80,000 is not what you would calculate your tax liability off of just yet. You get to take advantage of the Standard Deduction which is a specific dollar amount that the IRS gives you that reduces the amount of income on which you’re taxed. This amount adjusts each year as well, so you will need to look up what the current amount is for the year you are estimating taxes on.
Continuing with the example of the single person earning an income of $80,000, they find that their standard deduction is $15,000 for tax year 2025 thus reducing their taxable income to $75,000. So, let’s see how their tax liability is calculated using the 2025 tax bracket chart up above.
Pay 10% up to $11,925= $1,193
Pay 12% from $11,926 to $48,475= $4,386
Pay 22% from $48,476 to $75,000= $5,836
Individual tax liability total is $11,415
If you are in business for yourself, you generally need to make estimated tax payments which include not only your individual income tax but self-employment tax as well.
Self-employment tax consists of the taxes paid for Social Security and Medicare. As an employee, the employer pays half of the tax and the other half is deducted from your paycheck. By contrast, a self-employed taxpayer must pay both halves of these taxes.
The Social Security portion of self-employment tax is 12.4%. There is a maximum earnings amount subject to Social Security tax. For tax year 2025, this maximum is $176,100.
The Medicare portion of self-employment tax is 2.9%. Unlike the earnings limit subject to Social Security tax, there is no earnings limit for Medicare taxes. You will also need to pay an additional 0.9% in Medicare tax if your self-employment income is over $200,000.
To calculate the amount you calculate the self-employment tax on, you start with your income received from operating your business, then deduct all allowable business deductions, including depreciation. This will be your net income amount or sometimes referred to as your bottom line.
The IRS gives self-employed individuals a deduction of one-half of the self-employment tax amount reported as an adjustment to income on Schedule 1 of your tax return.
Because of this deduction, the percentage of self-employment income subject to self-employment tax is not 100% but 92.35%.
So let’s do an example again using the single person who earned $80,000 in income. This income is from operating a business and is also subject to self-employment tax.
The following is how you would calculate the self-employment tax.
1) Self-employment income ………….. $80,000
2) Multiply line 1 by 92.35%..................$73,880
3) Multiply line 2 by 15.3% (12.4%(Social Security)+2.9% Medicare)……$11,304
In addition to the individual income tax of $11,415 calculated above, this taxpayer must also pay Self-employment tax of $11,304. In total their tax liability will be $22,719 for the 2025 tax year.
When do estimated taxes need to be paid?
For estimated tax purposes, the year is divided into four payment periods. Each period
has a specific payment due date.
Estimated tax payments are generally due:
April 15 for income earned January 1 to March 31
June 15 for income earned April 1 to May 31
Sept. 15 for income earned June 1 to August 31
January 15 for income earned September 1 to December 31
Note: If these due dates fall on a Saturday, Sunday or legal holiday, the payments will be due the next business day.
You can pay estimated tax payments for both income tax and self-employment tax.
NOTE: If you live in a state that has taxable income, you will also need to pay estimated taxes to the state that you live in.
If you don’t pay enough tax by the due date of each of the payment periods, you may be
charged a penalty even if you are due a refund when you file your income tax return.
How do you pay your estimated tax payments?
You may send estimated tax payments by mail using Form 1040-ES, or you can pay online.
Making payments by mail: Mailing Address for Estimated Tax Payments
Making payments online: Pay estimated tax payments online
If you would like assistance in calculating your estimated taxes or would like to be added to our email reminder list, just give our office a call and we would be happy to assist you.
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