Carrie C. Susz, EA

Every year we have clients that need tax estimates so that they don’t have to pay an underpayment penalty when they file their taxes. It’s not a difficult thing to prepare, but if you’re self-employed and your income varies from year to year, the form can be a little confusing. There are a couple of options for figuring out how much to pay.

First, an explanation of self-employment taxes: all income from a “job” is subject to Medicare and Social Security taxes. If you have a regular employer, then the Medicare and social security taxes are automatically withheld from your paycheck. One thing that people don’t see on their check is the employer’s portion of the Medicare and social security taxes. While you are paying 1.45% for Medicare and 6.2% for Social Security, the employer is paying a matching amount. Self employment taxes cover the entire amount that both the employer and employee pay. The basic rate is 15.3% ((1.45+6.2)*2).

There are a couple of additional rules that apply to this type of calculation: if your personal income after expenses is over $102,000 there is a maximum amount of social security to calculate in. Also, when preparing your tax return, you can take ½ of the self employment taxes as a deduction against your income on the bottom of the 1040.

The IRS’s explanation is available here. IRS Publication 15 is also a great tool to use to roughly calculate what your basic federal tax withholding should be (it does not include medicare and social security—only taxable wages); tables are near the end of the publication.

We’ve made an easy little excel spreadsheet to get you started calculating your estimated payments, it’s available here: 2008 estimated payment calculator. if you get stuck, we put some helpful explanations on the “Instructions” tab of the spreadsheet.