How to calculate estimated taxes - 1040-ES Explained! {Calculator Available}

estimated taxes were never something i had to worry about when i was working my corporate job i got a w-2 i paid my taxes at the end of the year i had taxes withheld from my paycheck because that's what you do when you have a w-2 and you have a normal paycheck as an employee and i wasn't really until i started working for a small business and then i had my own business that estimated taxes became a huge part of my life so uh they might be part of your life too if you're a small business owner and that is what this channel is all about we're trying to help small business owners with their financials so this video is all about helping you calculate and helping you understand estimated taxes and estimated tax payments all right so if that sounds interesting to you this is a video that is meant to be timely we are in january we are at the beginning of the year and there is always an estimated tax payment deadline in january so that is why we are putting this video out hopefully it's timely for you so um stay tuned if you need any help on estimated tax so with that being said if this is the type of information that you need in your business please please please go ahead and subscribe to the channel because we are gonna keep bringing this type of stuff and hopefully try to make it as timely as possible so also make sure you click the little notification button so you know when things come out because i do try to make them timely for what's going on in the world all right so okay well let's just go ahead and talk about estimated taxes so what are estimated taxes why are we even like it sounds kind of boring right estimated taxes taxes are already boring and then now we have an estimate to add on to them um well estimated taxes are just kind of part of what we have to do as small business owners because when we make money especially when we make profit we are going to owe taxes on it and the irs has this pay as you go system they don't like the idea of you making tons of profit and then a year or two down the road when you actually get around to filing your taxes you remit the taxes to them they don't like that you know why well they like the timeliness of when the profit is earned or when the money is earned to when the taxes are actually paid so they're trying to get those time periods to match up much more closely but they also know there's a big burden associated with figuring out your exact profit and then remitting taxes so what they've come up with is a system that we can assess how much money we think we've earned and then pay an estimate and then it doesn't actually have to be trued up 100 until you actually um you actually file your taxes okay so um there is we we have some minimums that we have to reach and really with the irs the big thing is that they want you to be paying something in they want you to be trying to pay the right amounts okay so that's what we're gonna help you do today and i've got an awesome spreadsheet that will be available in the description box below but we're going to get into that in just a little bit okay and so i also want to say that this is like not tax advice you guys what this is is it's guidance and it's i'm i'm helping you understand some of the irs forms that they have that's supposed to help you but even when i go and look at these forms like the 1040es it's still kind of confusing so what i tried to do is break down that information and give it to you in a really like easy digestible format and then the spreadsheet that i have actually will do the calculations for you so we're going to talk through that today so the biggest group of people that need to pay estimated taxes are business owners so um like i said if you're earning a w-2 wage you're probably having some taxes withheld from your paycheck um hopefully you've calculated what you need to cover those wages and you're you're fine there but you might be earning other profits in business or even from other things that you're doing where you might need this this concept of estimated taxes you might need to pay more in um than just what's being withheld from your paycheck now some of you who are escort owners you're probably paying yourself you should be paying yourself a w-2 and taking a distribution from the profits of your business um so we're actually going to go through an example of an s corp owner that kind of has both which will sort of give you an example of what's going on here and some things to think about if you need to make estimates like that all right so when you're making estimates um we are thinking about you know we're trying to sort of predict the profit the profit in our business and that's that's kind of hard to do so the irs gives you options and they say you either need to pay a hundred percent of what you paid in your last year's tax liability so you might have paid all in maybe even you and your spouse all in might have paid 25 000 into the irs and so what they're saying is they expect you to make to pay in the next year at least that same amount of taxes or they want you to estimate and get close to what your actual tax liability will be and you need to be within 90 of what that actual tax liability is if you don't hit those two thresholds either one and you can take the minimum and we'll talk about that but if you don't hit either one of those thresholds you could be penalized okay so if you've paid no estimated taxes whatsoever and then you just get around to your tax return and you could be hit with a penalty you probably will be hit with a penalty so please please please make sure that you do not get hit with irs penalties they are a pain to deal with and you just don't want to be there okay so let's try to avoid those if at all possible all right now one caveat to that is that if you are a high wage earner you earn over 150 000 annually you have to um instead of 100 of last year's tax you actually the minimum is 110 of last year's tax okay so they they do want to say hey you know pay us more um so this is kind of the situation where you have to decide and this is where strategy comes in you have to decide do i want to just pay what last year's tax was or do i want to try to do the work to try to figure out what i think my actual income would be and i can try to get closer to the 90 rule and so this really helps when you have let's say you have an earnings trajectory that's going up and you know that you earn more this year than you did last year so if that's the case you might want to save cash and just pay last year's taxes and say okay i know i will pay 100 of last year's taxes i want to save my cash right now i don't want to pay it out to the irs right now so i want to save it and i'm going to try to i'm just going to use last year's taxes for my estimated payments now you might be in an opposite situation where you're like oh my gosh i have so much money i don't want to hold on to this i'm going to burn through it if i hold on to it so in that situation you want to try to pay closer to your true liability in the current year okay so this is about knowing yourself knowing what type of business owner you are and also knowing like what you know what you would prefer would you rather hold on to cash now and maybe you're doing something with it you're being productive with it or would you like to go ahead and get it paid out to the irs okay another situation that we've had especially over the pandemic is when somebody's earnings were higher but their actual profits during this pandemic time have been really low or even at a loss position so in that situation you wouldn't want to pay last year's taxes because you could have be having to pay out tons of cash when you know your tax liability is actually going to be you know zero because maybe you're in a loss position okay so in that situation you want to estimate closer to what you believe your taxes will be and then you can pay based on that okay so some there are some years and i've had clients where we say hey we actually don't have to estimate any taxes right now because you are in a lost position and so we just kind of do that on a regular basis and i say hold off don't pay those payment coupons that your cpa gave you because that's just cash that you're going to get back in a refund and and we need the cash now you know so that's something to think about so you can think about what is your situation and you have options of what to do but what i am going to help you with now is we are going to get into a spreadsheet and this spreadsheet is basically something that i've created and what i've tried to do is make the 1040es easy it's like a fillable form i've got all the information you need for your taxes i've got a calculator so you can figure out what your tax rate is with the tax rate schedule from 2021 and we've got kind of an estimated one for 2022. we'll have to do another update once they finalize that but we've got a lot of the numbers in there but i'll show you guys that um so this spreadsheet is available for download and it is just a few bucks so if you want to grab that from my website and make it easy peasy on yourself check it out in the description box below so let's go ahead and get into it okay so here we are in the spreadsheet and this is our estimated tax payments and tax rate schedule for you and so you'll note up here that this is all based on this form the irs form here you can go ahead and copy and paste this and we can show you this is available on the irs website and it is lots of lovely lovely tax um tax guidance but we kind of wanted to simplify this for you guys and make it a little bit clearer and also just give you the calculations because half the battle sometimes is just figuring out what exactly it is that these um that these people want from us um so what i have here in this spreadsheet and i'll just kind of walk through it real quick we're going to walk through an example here and then i've given you a completely blank one here and then so you can calculate this for yourself and then we have a way that you can just keep track this is a little schedule based on what the irs has of keeping track of your estimated tax payments and then here is just a reminder of the upcoming due dates and then here's the self-employment tax calculation that we're going to walk through and actually we'll do this really briefly um the tax rate schedule so this is actually um fully calculated for you this is something that they have here this is updated every single year so this is the one to use for your 2021 taxes so that's what we're going to go through here and i'll show you how to calculate and where you need to go and how to use this table and the on this tab we have the 2022 tax rate schedules so you can use these schedules to estimate 2022 taxes so let's go ahead and get into the example so the example that i have i've left it blank and we're going to fill it out together so the first thing that we have here is we have a couple and this couple is married filing jointly and they own one of the spouses is the 100 owner of an s corp okay so both spouses are earning w2s and they're actually both earning a hundred thousand dollars a year um so one spouse is just employed by somebody else and then the other spouse is um um owns the s corp all right and then the s corp and the escort paid the spouse w2 wages all right because remember we're supposed to be paying our owners of of s-corps reasonable compensation so they got that on a w-2 and then the profits of the business were 50 000 so i'm putting all these things here um this is going into and i'm gonna show you this real quick um this estimated tax worksheet is basically what we're filling out so that's what these line reference numbers are okay um but i'm just putting it over here so this is added up our line one is 250 000 and we're just going to go ahead and have them take the standard deduction so that's 21 or 25 100 for the year and then we went ahead and also calculated a 20 qbi deduction so based based on the income of this couple they are allowed to take the qbi deduction so if you don't know what that is talk to your cpa make sure that that is being calculated for you all the software now calculates that so i can't imagine that somebody wouldn't be taking it but that is still in play so let's make sure that you take that and then remember that everything yellow is where you put inputs okay so everything else is just a calculation um you can also this is calculated actually so we can potentially put that as a yellow as well all right and then this basically just gives us kind of our expected taxable income okay so two hundred and fourteen thousand nine hundred dollars and what we're gonna do now is we're gonna go to line four and calculate the tax so two fourteen nine 900. let's remember that number we're going to go to our tax rate schedule and we're going to go to this married filing jointly schedule okay this is huge that you've you pick what type of tax filer you are are you single are you married filing jointly married filing separately this is huge because it changes the rates okay and the thresholds so what we're going to do now is we're going to put in we're going to find the range that this taxpayer is in and so they are over 1672 750 but under 329 850. so what we're gonna do is we're gonna type in the amount of taxes so or the amount of taxable income so 214 900 i'm going to type that in into the range here i'm going to type it in and this is my tax so i have this calculated for you guys all right so what we're going to do and i'm just making this easy on myself i'm making equals and then putting it over here 39618 is my tax okay so on 214 000 of income i've got a 39 000 618 tax liability okay now then it gives you options to put in amt which is the alternative minimum tax um we're not going to use that because not everybody has that so we're going to leave it out this is going to be a pretty plain vanilla kind of situation here all right and then we're getting to line seven and then it says add any other tax credits okay we don't have any of those it's giving the option then here to add self-employment tax that's what s e tax stands for so because this is an s corp we do not have self-employment tax now if i changed this and said hey this is not an s corp and we've got 150 000 of a sole proprietorship earnings then we would need to go over here and calculate a self-employment tax so we'd go over here we'd say 150 000 we would um this is all calculated for you it has zero earnest earnings subject to social security for this individual and then um it would and then this would basically calculate our self-employment tax for us here okay so that's something that you can use we're not going to go much more into detail on that but that is the calculator already and set up for you all right and then we've got any other taxes that need to be added there and then we will sum between the tax that we pulled from the tax rate schedule plus any self-employment tax and then plus any other taxes that may be there when we go to this it will potentially say um see instructions so you can look at the instructions there's not th these are not gonna like the other taxes are not gonna apply all that often to other people but um it is an option to have it there and add it in okay so this is basically leading us to line 11c and what this is saying is it's saying hey this is what we're expecting the tax liability to be for the current year okay and so these w-2s is what we were expecting our w-2 wages to be and this is what we expect our s-curves corp earnings to be for the whole year okay so this is what we expect our tax liability to be this align 11c now we have to determine how much do we actually need to pay the irs because remember we don't need to pay in our estimated taxes 100 of what's due we have options so we're going to go ahead and i have a little side chart over here and this couple happened to have paid 35 000 last year into taxes and so i went ahead and calculated them at um 100 and then 150 but we're actually using their higher 110 um over here so this is saying what is 90 of current year taxes is 35 656 but what is 110 of last year's taxes this is where we do the test we say which one is lower and that's the one that we're allowed to pay okay so the one that is lower is actually 90 of this year's tax liability is less than 110 of last year's so what this individual couple needs to have paid in by the end of the year in total tax whether it's withheld from their paycheck or it's um it's paid in estimated taxes they need to have a total of 35 656. so it just so happens that they already had thirty thousand dollars or they will by the end of the year have thirty thousand dollars of income tax withheld from their paychecks they set their deductions up for this so um you know this means that the remaining due is 5 656. so this couple actually had 30 000 withheld from their paychecks already or they will by the end of the year and so that that means that they're remaining due that they're gonna have to come up with for their estimated taxes this year is 56.56 all right and so this is saying um basically that they they will have a payment required and then this is calculating what that would be in four equal installments all right now i have two little calculations down here um you know if let's just say that we got to the end of the year let's just say that they've made this is january and the q4 estimated tax payment deadline is coming up and they have made zero uh estimated tax payments maybe this couple just found out that this is something they have to do if that's the case they can go ahead and make the full payment in their q4 payment and they may have missed these other installments you know ultimately that's not a huge deal it's more about do they get the full payment in by the deadline date of the q4 payment so um or maybe at the very beginning of the year they had a refund of two thousand dollars and they decided to roll it into their next year's taxes if that's the case then we would just true it up and the remaining would be 36.56 okay so take out whatever has already been paid year-to-date maybe this couple was on it they calculated this and they've already made three payments of 1414. that means they just have one more payment of 1414 okay so this is how this little calculator works down here and this is something that i added this is not something that's added in in the 1040es all right so because oftentimes what happens is somebody will miss a payment or um they will potentially not make any payments maybe they weren't profitable until q4 of the last year and that's when most of their income comes in and so it's okay to kind of do this true up at the end of the year all right but the purpose is to try to more closely match so if you earn more of your money in q1 to make sure that you're paying estimated taxes on that quarter and so on and so forth okay remember that pay as you go system with the irs okay so this is how this worksheet works okay so hopefully this is really helpful to you i really want you guys to use this tax rate schedule let's just go through a couple other examples so let's say if you were single and you were making thousand dollars as a sole um as a self-employed individual you would put your fifty thousand dollars here and then this would calculate your tax um let's say you're head of household and you're making 250 you would put it here oh that's 25 you would put it here and then it would calculate your tax of 28 450. all right so make sure you are using the proper filing status and then make sure you're using the proper range and get that into the right line okay so i tried to make this as easy as i can for you guys these tax rate schedules are not super fun but at least the calculation is done for you here and remember this is for estimating 2021 taxes and then we will move to the 2022 tax rate schedules um so yeah go ahead and use this to calculate your estimated tax payments remember that you can record your taxes paid copy this spreadsheet put it somewhere where you need it if you need to print it out and put it on your wall whatever you need to do go ahead and do that and then just keep in mind get these dates on your calendar make sure you know when these taxes are due and here's of that place again where you can calculate self-employment tax if you are um if you are filing a schedule c and you are subject to self-employment tax okay you guys well i hope this spreadsheet was super helpful feel free to recreate it yourself if it's something that you want to go and do the 1040es is available i put the link in the description box below if you want to go and grab that but also if you just want to grab it for a couple bucks it is available on my website so feel free to get it there all right you guys well thank you so much happy estimating i know that estimating taxes is a little bit of an art and a little bit of a science so i've tried to give you guys what you need in order to finesse and try to figure out what is the best for you and your business and also while keeping the irs happy okay all right well thank you guys so much have a wonderful day bye

Channel: Clara CFO Group

Views: 53,689

Keywords: estimated tax payments, estimated taxes, 1040-ES, 1040 es explained, 1040-ES form, how to calculate estimated taxes, reduce tax stress, estimate tax payments, how to estimate taxes, how to calculate estimated tax payments, quarterly tax payments, quarterly estimated taxes, when to pay estimated tax payments, Why we need to pay estimated taxes, estimated tax payments explained, what are estimated tax payments, small business taxes, tax payments, estimate taxes, quarterly taxes

Id: eFsL0LKPSYo

Length: 22min 53sec (1373 seconds)

Published: Fri Jan 07 2022