How to estimate quarterly tax payments
Many optometrists working in private practice, opticals, or even commercial modalities are treated as independent contractors as opposed to employees. Often times, there is not much of a difference between the two in regards to how you are treated or what your work entails. The distinction presents itself in how you are paid.
Independent contractors are treated as “self employed” and as such, are paid on a 1099 tax form rather than a W2 tax form. This is the form that an employer sends the employee at the end of the year to show the employees total earnings and will be critical for doing estimate quarterly tax payments.
The Basics of Tax W2 vs W9 in Optometry, and estimate quarterly tax payments– Interview with CPA Gary Topple
The difference between at 1099 and a W2 tax form
- As a 1099 tax filer, you are responsible for paying all necessary taxes to the government and calculating the withholding tax deductions from your paycheck.
- As a W2 tax filer, taxes are withheld by your employer, typically per paycheck.
- One of the biggest differences between a 1099 and a W2 pay modality is that, as a self-employed individual (1099), you are responsible for the full tax rate for FICA which is roughly an additional 7.5% cost to you, a sum that your employer saves. As a W2 employee your employer would have to pay this 7.5%.
- One benefit as a 1099 tax filer is that you are eligible to deduct “business” expenses from your wages. This can effectively save you money on your taxes.
Types of taxes to pay when doing estimate quarterly tax payments
As an independent contractor, you must pay federal, state, and local taxes, if applicable, on a quarterly basis. You will work with an accountant who will print you out “quarterly tax vouchers” for federal, state and other taxes. You will be responsible to mail these in on a quarterly basis, or you risk paying late fees.
Making quarterly payments can be very difficult as a new graduate because quite frankly, you may not know how much money you will make over the year. Usually a business or independent can use the previous years earnings as a guide to making estimated quarterly tax payments; however, as new graduates, we lack that luxury.
It is suggested to talk with an accountant and give them a general idea of your planned earnings and deductions. From there they can give you a range of how much money to save in order to pay your quarterly taxes.
This article will highlight how to go about making quarterly payment estimations, and I will share with you how I calculated and did my own estimate quarterly tax payments.
There are four fiscal financial quarters.
- Quarter 1 includes the months of: January – March.
- Quarter 2 includes the months of: April – June.
- Quarter 3 includes the months of: July – September.
- Quarter 4 includes the months of: October – December.
The dates for estimated federal quarterly tax payments differ slightly than the fiscal financial quarters and due dates for payments are as follows for estimate quarterly tax payments:
|Payment Period||Due Date|
|January 1 – March 31, 2014||April 15, 2014|
|April 1 – May 31, 2014||June 16, 2014|
|June 1 – August 31, 2014||September 15, 2014|
|September 1 – December 31, 2014||January 15, 2015*|
Payments for each quarter are generally due the following month ending the quarter, usually around the middle of the month, and this applies to federal and state taxes. Local tax due dates tend to be due at the very end of the following month upon the conclusion of the quarter. This is key for estimate quarterly tax payments.
I happened to live in Pennsylvania and began working in July. As such, I had not owed any tax obligations for the first and second quarters, but began in quarter three.
For Pennsylvania, state tax is standard 3.07%. Local tax which is based on where you live and varies, in my case 3.0%, and federal tax is based upon income brackets.
The vital thing that must be understood is that these are estimation payments. As your income varies, so do your tax obligations. In order to keep things simple, lets assume I will make 30,000$ from July through December.
Using tax brackets set by the federal government, you can figure out how much federal tax you owe based upon how much money you estimate to earn for the year.
For 30,000$, the federal tax owed filing as a single individual is $4,053.75 which was determined by using the 2013 Tax Rate Schedule which can be found here. These tax rate schedules can also be found in other locations such as this source which also happens to have a helpful tax calculator to assist you.
Calculations of my taxes for estimate quarterly tax payments.
In case you were wondering how I arrived at $4053.75.
[$892.50 + 15% of $21,075 (which is the amount of money earned over $8,925)]
Now because there are 2 quarters that I will be paying these taxes over (Remember: June through December and thus Q3 and Q4) I can divide this payment by 2 to determine how much I owe the federal government per quarter for the two quarters I would be working in.
[4053.75 / 2 = $2,026.88 per quarter]
The same idea can be applied to the local and state taxes.
For state tax in Pennsylvania, the rate is 3.07%; therefore, I will pay $30,000*3.07 = $921.00. To determine how much per quarter that amounts to, you simply divide that number by two.
[921.00 / 2 = $460.50 per quarter]
For local tax, as mentioned previously, this is dependent on where you live, my tax rate happens to be 3.00%; therefore, I will pay 30,000*3.00% = 900$
[900$ / 2 = $450 per quarter.]
Bringing everything together for estimate quarterly tax payments
At the end of the year, you will report the estimated tax payments made and overall total wages earned as an independent contractor. You will also be given an opportunity at this time to deduct business expenses from your taxable income that includes: travel, supplies, licensing etc. You can determine your deductions using form 1040 Schedule C.
If you overpaid on your estimated taxes, you will receive a refund, conversely if you underpaid, you will owe additional tax.
Be sure to set a little extra money aside when you file your taxes to pay the self-employment tax (FICA). To get an idea of what you will owe for FICA, the Self Employment Tax Schedule SE form is helpful. Here is the IRS instructions on how to use it.
Here are a few deduction pearls to consider with estimate quarterly tax payments.
- Do not forget that medical expenses can be deducted accordingly. Medical expenses including health insurance that is in excess of 7.5% of your adjusted gross income is eligible for deduction.
- There are other deductions that are deductible only if they cumulatively equal above 2% of your adjusted gross income which include professional dues and fees, tax preparation fees, and job hunting fees.
- Mileage deductions: Commuting from home to any work related office is not a deductible expense. You must commute from a work entity to another work entity for the mileage to be considered deductible. For more information, it is helpful to review these resources.
- Moving expenses are deductible if it involves moving closer to your place of business.
- Student loan interest paid up to a certain amount is also deductible.
- Traditional IRA contributions are deductible.
A few of our NGO team members are really familiar with this stuff, so if you need help just comment below.
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As always, this is meant to serve as a guide. Please consult an accountant or tax professional if you have any doubts or concerns.
For more tax articles see below