Nobody likes a big surprise on tax day. Finding out you owe thousands of dollars because your employer didn’t withhold enough throughout the year can be a nightmare come true. If you’re self-employed or run your own business, knowing in advance how much tax you should be paying is crucial since no one is withholding taxes from your income throughout the year. Fortunately, you can get a rough estimate of the taxes you’ll owe so that you’ll be prepared.
TL;DR (Too Long; Didn't Read)
There are various ways to estimate your taxable income, including online calculators and forms from the IRS. You’ll need to know your adjusted gross income and any tax credits or deductions you can expect to take.
Estimating Taxable Income
To calculate your taxes, you’ll start with your adjusted gross income. This is all of the earnings subject to income tax, including the amount of taxable earnings you were paid at your job, dividends, alimony, capital gains and distributions from retirement accounts. It also excludes certain deductions that come out of your taxable income, such as student loan interest and IRA contributions. This gives you a figure that helps you calculate your total tax bill for the year.
It gets a little more complicated from here. Once you have your AGI, you’ll then need to add back in items that can help you arrive at your modified adjusted gross income. This includes taxable Social Security benefits or payments, half of your self-employment tax, student loan interest, tuition and fees, passive income or loss, rental losses and exclusions like adoption expenses and income from U.S. savings bonds.
Knowing Your Tax Bracket
Even if you know your adjusted gross income for the year, you’ll need the current tax brackets to accurately estimate how much you’ll owe in taxes. Starting with the 2018 tax year, the tax brackets start at 10 percent, which applies to single taxpayers who make up to $9,525 or $19,050 if you’re married filing jointly. Single taxpayers who make between $38,701 and $82,500 will pay 22 percent. Married taxpayers pay 22 percent at $77,401 to $165,000. A taxable income calculator will automatically do this for you, but you will need the information if you are calculating manually.
If you are still filing taxes for the 2017 tax year, though, your tax return estimator will use the rates in place before the Tax Cuts and Jobs Act. The brackets still start at 10 percent, but that amount only applies to couples who make up to $18,650. Single taxpayers making up to $9,525 still pay this rate. If you’re single and made $37,951 to $91,900, you’ll pay $ 5,226.25 plus 25 percent of the amount over $37,950. Married couples making between $75,901 and $153,100 will pay $10,452.50 plus 25 percent of the amount over $75,900.
Using a Taxable Income Calculator
Manual calculation can be headache-inducing. It’s also completely unnecessary, thanks to the large number of tools now available to taxpayers. At any time during the year, you can use the IRS’s withholding calculator to determine what you should have withheld from each paycheck based on your estimated taxable income. EFile.com has a tax return calculator that walks you through determining your potential tax return or taxes owed by asking questions about your filing status, expected income and deductions. If you search the web for “tax calculator,” you’ll find a large selection of tax calculators that are up to date for the current tax year.
Many tax preparers also have tax forecasting tools that walk you through the steps of determining how much you can expect to owe. Professional tax preparers can also offer guidance on how much you should be having held out of your paychecks or, if you’re self-employed, guidance on paying quarterly taxes. Be sure to ask after each year’s tax appointment whether you should adjust anything, especially if you expect to make big changes in the coming year.
Adjusting Your Withholdings
Once you’ve used the taxable income calculator and achieved an estimate of how much you can expect to owe, you’ll need to pay a visit to your HR department to adjust your withholdings. If it’s later in the tax year, it likely won’t make much of a difference on this year’s taxes, but it will cover you for next year. You should have chosen your withholdings when you started your job, but you may not realize that you can change them at any time. You’ll complete Form W-4, Employee’s Withholding Allowance Certificate, which directs your employer on how much to withhold from each paycheck.
Although you can use the IRS’s withholding calculator to get the exact amount you’ll need, there’s also a manual tax return estimator available with Form W-4. It starts on page 3 and is called a personal allowances worksheet. Here, you’ll follow the instructions regarding how many dependents you’ll be claiming and whether you’ll be eligible for certain tax credits. At the end of these calculations, you’ll have a suggested number of allowances to claim on line 5.
It’s important to note that you don’t have to use the exact number suggested through the worksheet. You can claim as many or as few withholdings as you’d like. The more withholdings you claim, the less that will be withheld from each paycheck. This results in higher take-home pay throughout the year, but at the end of the year, if you haven’t paid in enough, you’ll have to pay the IRS the amount that you owe. If it’s more than $1,000 after all withholdings and refundable credits are taken, you may owe penalties. If you want a refund, you’ll simply claim fewer allowances, which means more will be taken out of each paycheck.
Estimating Taxes for the Self-Employed
If you’re self-employed, estimating your taxes is a must. You won’t have an employer submitting taxes to the IRS on your behalf throughout the year, so you’ll need to do this part yourself. You can use a tax calculator to determine what you’ll owe. Search the web for “self-employed tax calculator,” and you’ll find a great taxable income calculator to help. If you prefer to do things the old-fashioned way, the IRS has a worksheet that can help, called Schedule SE. You’ll input your information and arrive at the total self-employment tax you can expect to pay for the tax year. If you earned less than $400 after taking your losses, you won’t owe self-employment tax on that income.
Once you’ve arrived at an amount using the form or a tax return calculator, you’ll need to divide that by four and send in a payment by the designated due dates. At tax time, you’ll let the IRS know all the payments you made throughout the year and you’ll get credit for those, helping you avoid that costly penalty for underpayment if you owe more than $1,000. The form also has an estimated tax worksheet, and once you have the amount due, you can use this form to print out the slips you need to send in with each of your quarterly payments. You’ll send them by the 15th of April, June, September and January each year.
- NerdWallet: What Is Adjusted Gross Income (AGI)?
- IRS USTaxCenter: What Is Modified Adjusted Gross Income?
- Forbes: The New 2018 Federal Income Tax Brackets & Rates
- IRS: Withholding Calculator
- efile.com: Estimate Your 2019 Tax Refund
- SmartAsset: How Many Allowances Should You Claim?
- IRS: Topic Number 306 – Penalty for Underpayment of Estimated Tax
- After subtracting your expenses, exemptions and credits from your gross income, the result is your taxable income. This is the income you will use to calculate your income tax forms.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.