I started a new business as a consultant (sole proprietor) in Feb this year (2021). How do I estimate my taxes for this year?

[mesquitebean]

We can tell you how to go through the estimated taxes interview to figure quarterly estimated tax payments.  It will provide a couple of options for figuring it.

The method to get there depends on whether you have already filed your 2020 return or not.  We can tell you the steps when you provide that info.

[fanfare]

Use common sense.

Since you are now self-employed you must contribute at least 15% of income for SE tax, just for starters.

After this quarter you will have a better feel for what your Estimated Tax for the next quarter should be.

It's too late now to make the first quarter Estimated Tax payment.

[thebreddys]

Thanks for the response. I already filed my 2020 return. Am I right in thinking that for 2021 I have to estimate my future earnings and pay tax quarterly to avoid penalties? This is what the IRS seems to be saying, but I was wondering whether Turbotax can help me figure the tax I need to pay each quarter.

[thebreddys]

I didn't start earning until Q2, so I assume I have til Jun for my first payment. I will have a predictable first 12 months of earnings so I can estimate my tax accurately. But what I wanted to know is whether Turbotax can help me figure the tax.  I am already a Turbotax user so I assumed I could use some additional module or other to do what I need to do. 

[mesquitebean]

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@ thebreddys wrote:

I didn't start earning until Q2, so I assume I have til Jun for my first payment. I will have a predictable first 12 months of earnings so I can estimate my tax accurately. But what I wanted to know is whether Turbotax can help me figure the tax.  I am already a Turbotax user so I assumed I could use some additional module or other to do what I need to do. 

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The first quarter of estimated tax payment for 2021 was due April 15, 2021.  Since the IRS figures the penalties on a quarterly basis by default, it's possible when you prepare your return next year, you could have penalty and interest for the first quarter which would continue to accrue (although it may be possible to figure the penalty by a different method that avoids it.)   However, there are several ways to figure a penalty including a method to figure it based on income when it was actually received if received unevenly during the year, and also a way to figure it annualizing the income.    You could, if desired, still make a payment now which may not avoid a first quarter penalty, but may keep any additional interest from accruing.    The TurboTax interview will help you decide what to do.  See the steps I provide at the end of this posting.

Also see these 2 TurboTax articles:

Estimated Taxes:  How to determine what to pay and when

https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-how-to-determine-what-to-p...

Estimated Taxes:  Common Questions

https://turbotax.intuit.com/tax-tips/small-business-taxes/estimated-taxes-common-questions/L1luHqVdl

And this IRS article on Estimated Taxes:
https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

If more info is needed, the article has a link to IRS Publication 505.

You said you have already filed your 2020 return.  Here's how to open your already-filed return back up to go through the estimated taxes interview, calculate estimated tax payments, and print out 2021 Form 1040-ES vouchers, if desired.   In another post to follow this one, I'll also tell you how you can pay each quarter electronically instead of mailing a voucher and check.

NOTE:  When you open your return back up, do not make any changes in the return itself since it's already been filed.   It's OK to go through the estimated taxes interview.

You can go through the section "W-4 and Estimated Taxes" to figure your customized 1040-ES quarterly tax payments for 2021.    There is also a place in that interview to enter what you have already paid for 2021 (if applicable), and it will let you include any expected income changes or any other changes you have for 2021.

• Log in, and here's how to open your 2020 return back up:
• At the Tax Home or in the section "Your Tax Returns & Documents" for tax year 2020, look for a link "Add a State."
• Click on "Add a State."  (you don't really add one; that's just to get the return to open back up.)
• Once the return is open, click in the left menu column on Federal.
• Then at the top choose tab "Other Tax Situations"
• You may then see a screen "Your uncommon Tax Situations"
• Look for a button to open up "All uncommon situations" to get a list of topics.
• Scroll way down to the last category "Other Tax Forms" and click "Show More."
  
• Find topic "Form W-4 and Estimated Taxes" and click Start or Update.
• If you need to adjust withholding, go through the W-4 interview.
• If you don't need the W-4 (withholding) interview, you can skip that part and go to the 2021 estimated taxes interview.
• You may get a screen that says "Review your Estimates for 2021?" and asks "Do you want to review your income or deductions".  Say YES (or Review Now), so you can get to the additional questions.
• You will go through a lot of screens asking about expected income and deductions.
• Finally, you will come to a screen that says "Enter Payments You Expect to Make."
• There are some boxes there that say "Enter estimated tax payments you've already made for 2021."
• Next screen will ask "which method" to use to calculate your 2021 estimated payments.
• Next screen will ask if you want to print vouchers.
• If you want to pay them electronically instead of mailing the vouchers and payment, see my next posting below.

[mesquitebean]

As fanfare mentioned above, don't forget that your estimated taxes would include both income tax and self-employment tax.  

Also be aware that if you live in an income tax state, you may have to pay quarterly state estimated taxes as well.

Once you know the amount you want to pay each quarter, if you prefer to pay electronically, there are a couple of options to make Federal estimated payments that require no paperwork and no mail.  By paying electronically you don't have to mail a Form 1040-ES voucher and check.

One easy way is to make 1040-ES quarterly payments by using IRS Direct Pay electronically, and nothing has to be filled out and mailed.

https://www.irs.gov/payments

There is no fee to pay electronically at the IRS Direct Pay site if you choose to have it taken directly out of your bank account (ACH electronic withdrawal.)

  There is a service fee for paying by credit/debit card, however.   (NOTE:  If paying by credit card, there can be a hefty service fee.)

  If you decide to make a payment there out of your bank account,  for "Reason for Payment" choose "Estimated tax".  For "Apply Payment To" choose "1040-ES".  Then choose the tax year you're paying.

After paying, print out a confirmation for your records.

The advantage of IRS Direct Pay is that it doesn't require an initial pre-enrollment, unlike EFTPS which I'll explain in the next paragraph.

While you can use IRS Direct Pay each quarter, if desired, if you think you are going to be making quarterly payments for a long time into the future, then you may want to consider opening a free account at the US Treasury's EFTPS website (Electronic Federal Tax Payment System.)  You can even schedule quarterly payments in advance and make other types of Federal tax payments, such as a balance due on your Form 1040, etc.  For first time use, you have to set it up in advance with your banking info, and they send you a PIN in postal mail.  Once set up, you can then make online payments there at the EFTPS website, or payments can be made by phone with the PIN.   For more info on EFTPS, there is an extensive FAQ page in the left menu column at this link:

https://www.eftps.gov/eftps/

[mesquitebean]

As fanfare mentioned above, don't forget that your estimated taxes would include both income tax and self-employment tax.  

Also be aware that if you live in an income tax state, you may have to pay quarterly state estimated taxes as well.

Once you know the amount you want to pay each quarter, if you prefer to pay electronically, there are a couple of options to make Federal estimated payments that require no paperwork and no mail.  By paying electronically you don't have to mail a Form 1040-ES voucher and check.

One easy way is to make 1040-ES quarterly payments by using IRS Direct Pay electronically, and nothing has to be filled out and mailed.

https://www.irs.gov/payments

There is no fee to pay electronically at the IRS Direct Pay site if you choose to have it taken directly out of your bank account (ACH electronic withdrawal.)

  There is a service fee for paying by credit/debit card, however.   (NOTE:  If paying by credit card, there can be a hefty service fee.)

  If you decide to make a payment there out of your bank account,  for "Reason for Payment" choose "Estimated tax".  For "Apply Payment To" choose "1040-ES".  Then choose the tax year you're paying.

After paying, print out a confirmation for your records.

The advantage of IRS Direct Pay is that it doesn't require an initial pre-enrollment, unlike EFTPS which I'll explain in the next paragraph.

While you can use IRS Direct Pay each quarter, if desired, if you think you are going to be making quarterly payments for a long time into the future, then you may want to consider opening a free account at the US Treasury's EFTPS website (Electronic Federal Tax Payment System.)  You can even schedule quarterly payments in advance and make other types of Federal tax payments, such as a balance due on your Form 1040, etc.  For first time use, you have to set it up in advance with your banking info, and they send you a PIN in postal mail.  Once set up, you can then make online payments there at the EFTPS website, or payments can be made by phone with the PIN.   For more info on EFTPS, there is an extensive FAQ page in the left menu column at this link:

https://www.eftps.gov/eftps/

[thebreddys]

Many thanks for your help and detailed instructions mesquitebean! 

[thebreddys]

Just one other question...I followed the Turbotax process to calculate estimated Federal and State payments. Do those calculations include self-employment tax, or is that an additional amount that must be paid?

[mesquitebean]

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@thebreddys  wrote:

Just one other question...I followed the Turbotax process to calculate estimated Federal and State payments. Do those calculations include self-employment tax, or is that an additional amount that must be paid?

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Sorry, but I can't address any state estimated tax payments.  There are too many states.  But if the state estimated tax interview asked you if you expect SE income and how much in 2021, then I assume it does.     As for Federal, here's some info:

So I presume you went through the "W4 and Estimated Taxes" interview.  In the estimated taxes part of that interview, I assume it includes any SE tax because after you choose to adjust your income for 2021, there is a specific screen that should have asked about self-employment income expected in 2021.   Did you report in that interview that you would have 2021 self-employment income?  It looks like this:

.

.

And one of the final screens asks which calculation method you want TurboTax to use. 

It looks like this:

.

.

.

There is a "Safe Harbor" choice (the first option) of figuring the payments based on 100% of your actual 2020 Federal taxes, if desired, instead of paying the amount (or 90% of the amount) of your estimated 2021 Federal  taxes.   Paying the quarterly taxes based on 100% (110% if a high earner) of the amount of your 2020 Federal taxes avoids any underpayment penalty, and is the easiest and safest way to figure estimated taxes each year that avoids the penalty.     If you are a high earner, the amount is 110% of 2020 Federal taxes if your 2020 income was over $150,000 ($75,000 if Married Filing Separate).

NOTE:  If you use that Safe Harbor rule of 100% of 2020 (or110%) to figure quarterly payments, while it avoids any underpayment penalty next year, if you have more income for 2021 than 2020, you may have taxes due at the time of filing your 2021 return, but at least with no penalty.  

Your state may or may not have a similar "Safe Harbor" rule in regard to state estimated taxes.