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Tax Tips - Save on Taxes

Estimated Tax Payments

Here's what you need to do each quarter:

  1. Calculate Your Estimated Tax Payments
    Calculate your Federal and State estimated tax payments as follows:

    1. Federal Tax
      The Federal tax that you must pay consists of two components: an Income Tax and a Self-Employment Tax.

      1. Federal Income Tax

        1. Add your Net Income from Alimony, Your Net Federal Investment Income and your Net Income from Self-Employment together.

          The amount of Federal Income Tax that you must pay will depend upon your total income (AGI). If your AGI is approx. $75,000, multiply your Net Income by 22% (if approx. $150,000, multiply by 24%; if approx. $200,000, multiply by 32%; if more than $200,000, multiply by 35%).

        2. Multiply your Net Federal Long-Term Capital Gains Income income by 15%. This is the amount of Federal estimated income tax that you will pay on your long-term capital gains income. (If you expect that your Adjusted Gross In come (AGI) will be more than $479,000 (married couples filing jointly; $425,800 for single filers), multiply by 20% instead).

        3. Add these two subtotals together. This is the amount of Federal estimated income tax that you will pay.

      2. Federal Self-Employment Tax
        The Federal Self-Employment Tax applies only to income received from self-employment (if you received income from alimony, investment income or rental property, you may skip this step.)

        The Federal Self-Employment Tax is simply the sum of the standard Social Security and Medicare taxes, but levied twice - once on yourself as the employee, and a second time as the employer. This is exactly the same way that these payroll taxes are levied on the W-2 income of employees, and on the payroll of their employers. The Self-Employment Tax can be summarized as follows:

        Payroll Tax

        Employee Portion

        Employer Portion

        Total

        Social Security 6.20% 6.20% 12.4%
        Medicare 1.45% 1.45% 2.9%
        ------ ------ ------ ------
        Total 7.65% 7.65% 15.3%


        The Self-Employment tax is in addition to the Federal estimated income tax that is calculated in Paragraph 1 above.

        Normally, you should multiply your Net Income from Self-Employment by 15.3%. This is the amount of Federal Self-Employment tax that you will pay. However, the maximum earnings that are subject to the Social Security payroll tax is capped at $128,400 in 2018 ($132,900 in 2019). Once your Net Income from Self-Employment has exceeded this threshold, which usually occurs later in the year, you should multiply your Net Income from Self-Employment by just 2.9%.

        Reduction in Total Income
        . When you file your Form 1040 income tax return, you will receive a reduction (NOT a credit) of 50% of the total Federal Self-Employment Tax that you paid during the year. This reduction is reported on Form 1040, p.1, line 27, and is subtracted from your Total Income to arrive at your AGI.

        In the overall scheme of Federal taxation, this reduction will have a minimal impact upon the final result of your return when compared with the amount of Federal Self-Employment Tax that you’ve paid.

        Social Security Benefits. When you reach retirement age, you may become eligible to receive Social Security benefits at that time. The Social Security benefits that you do receive will effectively be repayment of the Social Security portion (i.e., the 12.4%) of the Federal Self-Employment Taxes that you had paid while you were self-employed.

        However, if you had worked as a Federal, state or municipal employee during your career, and contributed into a separate plan, you would not be eligible to receive Social Security benefits. In this case, the Federal Self-Employment Taxes you paid are, unfortunately, exactly that – additional taxes.

      3. Add The Two Federal Taxes
        Add your Federal Income Tax and your Federal Self-Employment Tax together. This is the amount of Federal estimated income tax that you will pay.

    2. State Income Tax

      1. Massachusetts residents only

        1. Add your Net Income from Alimony, Your Net Massachusetts Investment Income and your Net Income from Self-Employment together. Multiply this subtotal by 5.1%.

        2. Multiply your Net Massachusetts Short-Term Capital Gains Income by 12.0%.

        3. Add these two subtotals together. This is the amount of Massachusetts estimated income tax that you will pay.

      2. New Hampshire residents only
        Multiply your Net N.H. Investment Income by 5.0%. This is the amount of N.H. estimated income tax that you will pay.

  2. Payment Due Dates

    Estimated Tax Payments are not due at the same time each Quarter. Here is the schedule of the payment due dates: 

    Quarter

    Dates Included

    Due Date

    1 Jan. 1 to March 31 April 15
    2 April 1 to June 30 June 15
    3 July 1 to Sept. 30 Sept. 15
    4 Oct. 1 to Dec. 31 Jan. 15 (of the following year)


  3. Make Your Estimates Tax Payments
    You may pay your Estimated Tax Payments online, or you may mail a check to the respective tax authority.

    1. Federal Income Tax
      To make your Federal Estimated Tax Payment online through a direct debit from your checking or savings account at no cost to you, please visit IRS Direct Pay at this website: https://www.irs.gov/payments/direct-pay

      To make your Federal Estimated Tax Payment by mail, make a check payable to "United States Treasury" in the amount of the Federal estimated tax, write your SSN and "201X Form 1040-ES" (replace “X” with the last digit of the year) on the front of your check, and sign it. Mail your check along with the corresponding Form 1040-ES to the address printed on the form.

    2. State Income Tax

      1. Massachusetts residents only
        To make your Massachusetts Estimated Tax Payment online through a direct debit from your checking or savings account at no cost to you, or with your American Express, Discover, MasterCard or VISA credit card plus an additional convenience fee of 2.30% of the amount of your payment, please visit MassTax Connect at this website: https://mtc.dor.state.ma.us/mtc/_/#2

        To make your Massachusetts Estimated Tax Payment by mail, make a check payable to "Commonwealth of Massachusetts" in the amount of the State estimated tax, write your SSN and "201X Form 1-ES" (replace “X” with the last digit of the year) on the front of your check, and sign it. Mail your check along with the corresponding Form 1-ES to the address printed on the form.

      2. New Hampshire residents only
        The New Hampshire Dept. of Revenue Administration does not offer the capability to make your N.H. Estimated Tax Payments online.

        To make your New Hampshire Estimated Tax Payment by mail, make a check payable to "State of New Hampshire" in the amount of the N.H. income tax, write your SSN and "201X Form DP-10 ES" (replace “X” with the last digit of the year) on the front of your check, and sign it. Mail your check along with the corresponding Form DP-10 ES to the address printed on the form.



Tax Tip:

Make your 4Q Mass. or N.H. estimated tax payment during the last week of December, instead of on Jan. 15. This will allow you to deduct that one payment on the current year’s Federal income tax return. (There is no tax benefit for making your 4Q Federal payment any earlier)

I would be happy to prepare a complete set of pre-filled-in Federal Form 1040-ES and Mass. Form 1-ES forms or N.H. Form DP-10 forms, for you to use to make your quarterly estimated tax payments.

 

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