Once you get tired of paying estimated tax penalties in April or even the following October, you may decide to start paying quarterly, estimated tax payments. The problem is that self-employed people do not have steady income, which is easily estimated. Your income is up and down for the year. You usually don’t know what your income is until the year is over.
Years ago, a realtor client/friend and I went through a number of models for calculating estimated taxes. After a number of tries, we finally landed on a winning formula.
What we ended up doing was developing a ratio of total tax expense, per his tax returns (both Federal and State), divided by his gross commission income. We ignored all the noise on his tax returns and just focused on those two numbers. In his case the number worked out to be 18 percent.
Total Tax Expense (Federal + State) / Gross Commission Income = Estimated Tax Percent
If you try this method and set aside whatever percentage you come up with from each settlement, you will have the money for each of your estimated payments. Go ahead, treat yourself to something fun from the estimated tax penalty you will have saved.
If you need help with your taxes, give me a call.