How to calculate estimated tax payments

[mellynlee]

I am resubmitting my question in this section, was also in "After Taxes Are Filed".

I want to verify that I am calculating my estimated tax payments correctly. I originally tried to use the TurboTax (online) version to do this for me, but found it way too complicated. My main objective is to avoid the underpayment tax penalty (which we owed for the last 2 years - 2021 and 2022).

I believe we will have a higher AGI this year than last year, so I am going to assume we can just pay 110% of last year's taxes owed, in order to avoid the penalty.

This is how I'm figuring it out:

I multiply last year's tax owed (1040, line 24) by 110% to get an amount owed next year. 

Call this number X.

I have our 3/31/23 paycheck stub. From this, I look at the YTD Federal Income Tax withheld, and I multiply this number by 4. (I'm assuming it will be about the same each quarter, AND I do NOT have to include the Employee Medicare and SS Employee Tax amounts??) Call this number Y.

Now, X - Y = amount I have "underpaid"

I take this amount and divide it by 4, and then I can pay this amount as my estimated tax payments each quarter.

If I do this, then we will avoid the underpayment penalty next year. EVEN if we end up selling stock, and will owe taxes on that stock, we still won't have an underpayment penalty.

Is this correct, or am I missing something else?

Also, do I need to enter any estimated tax payments into TurboTax, or can I just use the irs.gov website to pay the estimated taxes?

[ee-ea]

It is not so complex.

X= 110% of 2022 tax divided by 4

subtract A which is tax withheld to date

P= payment

X-A=P

Do this on 3/31, 5/31, 8/31 & 12/31

Use the irs.gov website to pay the estimated taxes.

Please give feedback. If this helps click “Thumb” or “Best Answer” if it’s a solution.

[mellynlee]

Thank you - that method does seem easier!

A couple questions just to clarify:

-When I subtract 'A' (tax withheld to date), I only include the Federal tax -- NOT the medicare or social security taxes - correct?

- By paying these estimated taxes quarterly, we will avoid the underpayment penalty -- even if we sell stock this year and therefore will owe more in capital gains taxes?

- I only need to make this payment on irs.gov. I do not need to file or print out any extra forms, correct?

Thank you for your help!

[mellynlee]

Can someone please verify that what I wrote in my last post is correct?

ALSO, I have a question regarding the calculation of estimated payments for May, August, and December.

You state that I should do the same calculation that I did for March, which is:

X= 110% of 2022 tax divided by 4

subtract A which is tax withheld to date

P= payment

X-A=P

Do this on 3/31, 5/31, 8/31 & 12/31

This method works fine for 3/31. However, in 5/31 (and later), if I use A as the tax withheld to date, A will be all tax withheld from 1/1 - 5/31, which will be a much greater number than the first quarter, and I will be subtracting it from X, which is just 1/4 of the total tax. This cannot be correct...

Should I recalculate A each quarter like the following:

5/31: A = 5/31 YTD fed tax withheld - 3/31 YTD tax withheld

8/31: A = 8/31 YTD fed tax withheld - 5/31 YTD tax withheld

12/31: A = 12/31 YTD fed tax withheld - 8/31 YTD tax withheld

Then, the X - A should have the correct payment each 'quarter'.

[JohnB5677 · Accepted solution]

When I subtract 'A' (tax withheld to date), I only include the Federal tax -- NOT the Medicare or social security taxes - correct?

• If you own a business and you have self-employment calculated, you will include it.  If you simply have wages and investments you will not.

By paying these estimated taxes quarterly, we will avoid the underpayment penalty -- even if we sell stock this year and therefore will owe more in capital gains taxes?

• If you pay 110% of your 2022 taxes, you will not incur a penalty for additional capital gains taxes.

I only need to make this payment on irs.gov. I do not need to file or print out any extra forms, correct?

• If you make the Online payments, you do not have to submit the paper copy to the IRS.

Your formula is correct:

X= 110% of 2022 tax divided by 4

subtract A which is tax withheld to date

P= payment

X-A=P

The payment due dates are:  4/18/2023,  6/15/2023,  9/15/2023  & 1/16/2024

for 4/18/2023

X= 110% of 2022 tax divided by 4

A = tax withheld to date 

X - A = P

For 6/15/2023

A is payments including payment from 4/18.

2X - A = P

For 9/15/2023

A is payments including payment from 4/18 & 6/15

3X - A =P

For 1/15/2024

A is payments including payment from 4/18 & 6/15 & 9/15

4X - A =P

[mellynlee]

Great - thank you!