Very hard to calculate quarterly estimated tax payments

[jcarchila]

Hi there, this year I've switched to a contractor role and have been making all of my income as sole proprietor of my LLC. I'm very new to this new tax situation and wasn't aware that I should've been making quarterly payments. To not miss the September deadline for the next payment I'd like to better understand how to calculate what I should pay, however the Form 1040-ES has proven incredibly complicated for me to understand how to fill out. What would be the best way to receive assistance with this?

[JBedford · Accepted solution]

Thanks for your question, @jcarchila! The simplest thing to do is to pay in 100% of your 2022 tax liability from Line 24 of your Form 1040 (110% if f you make over $75,000 as a single filer, or $150,000 if married filing jointly, in self-employment income.) Since you missed the first two payments, I would pay in 75% of that number before September 15, and the remainder before January 15. This amount is a "safe harbor" that will prevent the IRS from assessing an underpayment penalty (though you might still get a smaller penalty due to the first two payments being late). However, don't forget to count any other tax payments you make. For example, if you have tax withheld from a job. This will reduce the amount you need to pay. 

Hope this helps, please let me know if not!

[cabusby1]

Once you've calculated your tax due, you can make payments directly to the IRS. You don't have to wait to make quarterly payments. https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

[jcarchila]

Hi @JBedford, thanks for the quick reply! I believe my situation is actually quite complex - I filed most of my 2022 taxes as a full-time W2 employee and only started working as a contractor in October 2022, meaning that my 2022 tax forms reflect a very different tax situation to my current one (most importantly, most of my 2022 taxes were automatically withheld by my full-time job). 
When I access Form 1040 from my 2022 return, I can't seem to find any figures on line 24 that would reveal any tax liability. I have a rough idea of the amount of tax I'll need to pay when it comes time to file my taxes for 2023, so my next question is - if I'm unable to calculate an accurate quantity for quarterly payments and simply pay money to the IRS, it will automatically count towards any estimated tax payment, correct?

[JBedford]

If you indeed had zero tax liability last year, then you should not incur an underpayment penalty, even if you don't pay anything. But to answer your question, yes, all payments to the IRS count "the same". They don't care if it's an estimated payment, or withholding, or just a regular old payment. 

[jcarchila]

@JBedford Interesting. I would've just assumed that, because I'd failed to make earlier quarterly payments and none of my taxes are currently being withheld for 2023, that I would've definitely incurred an underpayment penalty. That being said, however, it's great to know that I can just make a payment to the IRS and it should count towards my taxes. When I log onto my IRS account it doesn't necessarily say that I owe any money currently, but I'll still make sure to make a sizable payment soon to make up for the previous 2 payments that I missed. 
Thank you SO MUCH for your help! I've been so lost in this whole process - I really appreciate it!

[JBedford]

My pleasure! But no, the IRS site won't show tax owed until a return is actually filed. 

[VolvoGirl]

For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits.

- 2. You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your current year’s tax return, or
100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year you start with your current return, (if you can't get back into your return try this, On the Tax Timeline page you have to select Add A State to get back into your return). But be careful not to change anything on your real return.

Go to Federal Taxes or Personal (Home&Business version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

Say No to W4. When you get to the W4 and Estimated Taxes section, say you want to adjust your income to go though all the screens.

TIP - If you didn't owe or missed making the prior quarterly estimated payments and need to just calculate starting now, you can go though the Estimated Taxes section and just put $1 (one dollar) in for the quarters you missed. Then it will only figure the current and remaining quarters.

The 1040ES quarterly estimates are due April 18, June 15, Sept 15 and Jan 16, 2024. Your state will also have their own estimate forms.

How to make the Estimated payments
https://ttlc.intuit.com/community/tax-payments/help/how-do-i-make-estimated-tax-payments/00/25875

Here are the blank Estimates and instructions…..
https://www.irs.gov/pub/irs-pdf/f1040es.pdf

Or you can pay on the IRS website. Be sure to pick 2023 1040ES payment
https://www.irs.gov/payments