How to Calculate Estimated Taxes

In this month’s video, I explained some of the basic rules regarding Federal estimated tax payments.  If you need a refresher on what payments are required, please watch the video before reading ahead.  To dive in a little deeper, let’s look at a few examples of calculating the amount of estimated tax you should prepay throughout the year.

Example 1:
Dr. Miller was a W-2 physician in 2017 with a total tax liability of $24,000.  In January 2018, he left his W-2 job and began working as a 1099 contractor.  If his income tax and self-employment tax will total $34,200, how much is he required to pay in estimated taxes for 2018?

110% of his 2017 tax liability (line 63 of 1040): $26,400
90% of his estimated 2018 tax liability: $30,780

Dr. Miller is only required to prepay 110% of what he owed for 2017, although his overall tax for 2018 will be higher.  He will need to be prepared to pay the difference when he files his taxes in April 2019.

Example 2:
Dr. Thomas has been a 1099 contract physician for several years.  In 2017, she had a total tax liability of $53,000.  In 2018, she plans to take off a few months of the year in order to travel more.  With the reduced income and additional tax benefits for 2018, her projected tax liability is $36,055.  How much is she required to pay in estimated taxes for 2018?

110% of her 2017 tax liability (line 63 of 1040): $58,300
90% of her estimated 2018 tax liability: $32,450

Dr. Thomas should carefully calculate her projected liability in order to pay in a lesser amount.  Since she knows her income has decreased from 2017 to 2018, she would end up with a large overpayment if she based her quarterly payments on her 2017 bill.

Example 3:
Drs. Jackson are a dual-physician couple who both work W-2 jobs.  One of them also has a side gig earning about $15,000 as a 1099 contractor.  In 2017, their tax liability was $88,400, and in 2018, they anticipate their income to be similar.  Under TCJA, they anticipate their tax liability to decrease to $70,700, and their withholdings are now $71,900.  Do they have to pay in any additional estimated taxes?

110% of their 2017 tax liability (line 63 of 1040): $97,240
90% of their estimated 2018 tax liability: $63,630

Their withholdings sufficiently cover the minimum amount to avoid an underpayment penalty, as well as the full anticipated balance for 2018.  Even though they have side income that doesn’t have taxes deducted, their withholdings are set up in such a way that estimated tax payments are unnecessary.

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