How to Compute Your Estimated Quarterly Taxes

By Melissa Batai

* The information contained in this article is general in nature and is not intended as tax advice.

If you work for a traditional employer, your taxes are automatically deducted from your gross income. You don't feel the sting of paying taxes because they are taken before you even see your money.

However, if you're a small business owner, paying your taxes can be painful because you see the money in your account first and then must send off your payments four times a year--April 15, June 15, September 15, and January 15. 

Estimated taxes are to be filed quarterly by all business owners unless you did not owe any business tax for the previous year (likely if this is your first year being self-employed).

There are three ways to compute your estimated business taxes:

1.  Hire an accountant and have her do it.  This is, of course, the easiest and most expensive route.  I chose to go this way because I didn't want to pay a penalty should I estimate my quarterly taxes incorrectly.  My accountant simply sends me a slip of paper that I mail in with my quarterly tax each time it's due.  This method is very convenient.

2.  Determine what you owe based on what you owed last year.  You can take your total tax burden from last year's return and divide it by four.  The amount you get will be the amount that you pay each time quarterly taxes are due.  Generally, even if you end up owing more than you paid in estimated taxes at the end of the year, you will avoid penalties because you paid 100% of last year's tax burden.

3.  Use IRS Form 1040-ES to determine your quarterly taxes.  The IRS supplies a PDF package that walks you step-by-step through figuring your quarterly taxes.  To compete this form, you will need to know your expected income from self-employment for the year as well as your expected wages from your traditional employer, if applicable.

Paying quarterly taxes is one responsibility that you have that you didn't have when you were employed outside the home.  However, once you take the initial step to figure your estimated taxes, you'll find updating each year is easy to do.

Do you determine your own estimated tax or do you rely on an accountant?