Payroll Taxes

What Is Form 1040-ES?

Unlike taxpayers who earn a salary and have taxes withheld—that is, taken out of their paychecks—taxpayers who are self-employed need to make estimated tax payments to Uncle Sam to stay caught up on their taxes. Taxpayers who might need to make estimated payments include:

  • Freelancers.
  • Those with business income like owners of pass-through businesses, such as partnerships, LLCs, or S corporations.
  • Individuals with significant income from other sources like a trust.

The IRS requires estimated taxes to be paid every quarter, and if business owners don’t stay on top of these estimated payments, they may get hit with penalties for late payment.

So make sure you don’t miss a deadline, and file form 1040-ES to report your payments to the IRS.

So who, exactly, needs to use Form 1040-ES?

In general, the IRS says that if the following two conditions apply to you, you should use Form 1040-ES to make estimated tax payments:

  1. You expect to owe at least $1,000 in taxes for 2018 after accounting for taxes withheld from other sources and tax credits that can reduce your overall tax liability.
  2. You expect your withholding and refundable credits to be less than:
    • 90 percent of the tax on your 2018 return, or
    • 100 percent of your tax on your 2017 tax return.

Don’t worry, we walk you through all of this below.

Most business owners who don’t pay themselves a salary need to make estimated tax payments; same with freelancers who receive 1099s from their clients. In both of those situations, taxes are not withheld and turned over to federal and state government agencies.

When are estimated tax payments due?

You can pay all of your estimated tax on Tax Day or in four equal installments throughout the year. If you choose to pay in installments, the first payment is due when you file your return (no later than April 15 in most years) and should be 25 percent of the total.

If you underpay the total, any of the installments, or fail to pay on time, penalties and interest could be assessed on top of your tax liability, so it’s important to make the estimate as accurate as possible. Here’s what the 2018 payment schedule looks like:

  • 1st payment: April 17, 2018
  • 2nd payment: June 15, 2018
  • 3rd payment: Sept. 17, 2018
  • 4th payment: Jan. 15, 2019

If you file your 2018 tax return and pay the balance due by January 31, 2019, you do not have to make the final estimated payment on January 15.

How do I figure out my estimated tax?

Form 1040-ES has a revised worksheet for estimating your total taxes due and, if you’re making installment payments, what that first installment should be. Here’s what the new worksheet looks like:1040-ES 2018 estimated tax worksheet

Lines 1-11

This worksheet starts with your Adjusted Gross Income and subtracts:

  • Either the standard deduction or your itemized deductions, whichever is greater (line 2a), and
  • The 20 percent deduction for taxpayers who qualify for it (line 2b).

This results in your estimated taxable income on line 3, and tax due on line 4.

From there, other taxes such as the alternative minimum tax (line 5) and self-employment tax (line 9) are added to determine your total taxes due, and credits (line 7) are then applied to reduce that total to arrive at “Total 2018 estimated tax” on line 11c.

Here are the formulas for figuring out your total estimated tax:

How to calculate your total estimated tax

Adjusted Gross Income expected in 2018

 Standard Deduction OR Itemized Deductions

20 percent of Qualified Business Income (if applicable)

————————————————————————————

= Estimated taxable income

 

Estimated taxable income x Applicable tax rate = Estimated tax due

 

Estimated tax due

+ Alternative minimum tax (if applicable)

Non-refundable tax credits (i.e. can only reduce tax liability to zero)

+ Self-employment taxes (if applicable)

————————————————————————————

= Total taxes due

 

Total taxes due

Refundable tax credits (i.e. can reduce tax liability to less than zero)

————————————————————————————

= Total estimated tax

Lines 12-15

The next section determines whether you actually need to make estimated tax payments.

As a recap, you only need to do so if both of the following are true:

  • You expect to owe $1,000 or more in 2018 taxes.
  • You expect your withholding and refundable credits to be less than 90 percent of your 2018 tax or 100 percent of your 2017 tax, whichever is smaller.

Here’s a quick example to illustrate how it works. Let’s assume:

  1. You expect to owe more than $1,000 in taxes in 2018.
  2. You expect $10,000 of withholding and credits in 2018.
  3. You expect your total 2018 taxes will be $9,500.
  4. The taxes due on your 2017 return totaled $11,000.

In this case, condition 1 is met because you expect to owe more than $1,000 in taxes for 2018. Because your expected 2018 tax amount of $9,500 is smaller than your 2017 taxes of $11,000, that’s the number we use for condition 2. And because $10,000, the expected total of withholding and credits, is not less than 90 percent of $9,500 (i.e. $8,550), the taxpayer in this scenario would not need to make an estimated payment.  

Now, if everything remains the same except the total taxes due in 2018 were $20,000, then 90 percent of that would be $18,000, which is greater than the expected withholding of $10,000. In this case, the taxpayer would have to make an estimated payment.

Whew! That calculation gets us down to line 15 of the worksheet, where your estimated payment will be one-fourth of line 14a, if you’re making your payments quarterly. And while you may not be too thrilled that you have to make an estimated payment, at least you’ve conquered another IRS form. That’s no small feat.

Did the new tax law affect the 1040-ES?

Yep! If you look at the 2017 form, you’ll see that the worksheet on page 8 is slightly different than the new 2018 worksheet.

1040-ES 2018 estimated tax worksheet highlighted

That’s because the new tax law:

  1. Eliminated personal exemptions — This was line 4 on the 2017 form; there’s no line at all for personal exemptions on the 2018 form.
  2. Added a 20 percent deduction for pass-through businesses that qualify — If you elected your business to be a pass-through and qualify for this deduction (read about the requirements here), it will be entered on line 2b.
  3. Reduced the tax rates for individuals — When you get to line 4 to calculate your tax, the rates you use will be very different than those from last year. This means that you might owe fewer taxes, depending on what you earn in 2018.

The rest of the Form 1040-ES worksheet is very similar. The calculation for estimating your taxes due does not change, and the conditions for making an estimated payment do not change.

What else should I think about?

One important thing to remember: If you’re making quarterly estimated payments to the feds, you probably should be making quarterly payments to your state, too. The obvious exception to this would be if you live in one of the nine states that don’t have an income tax.

Also, if you’re a business owner or freelancer and all this estimated tax payments stuff seems like more than you want to deal with, you may want to think about paying yourself a salary and having taxes withheld from your paycheck. You’ll need to consider a few factors unique to your business, including:

  • Your business type — Salaries are more common for owners of C or S corporations, but any entity type can pay salaries, of course.
  • How much to pay yourself
  • How often to pay yourself

If you’ve thought about all these things and have determined it’s a good fit, it may be easier to get a paycheck and let the payroll process take care of your taxes for you.

Ultimately, if you plan to freelance or start a business, estimated tax payments are almost certainly in your future. If you haven’t taken the leap yet, talk with your accountant and familiarize yourself with the Form 1040-ES so that you don’t miss a beat at tax time.

This article provides general information and shouldn’t be construed as tax, benefits, legal, or HR advice. Rules and regulations may change over time and may vary by location. So, please consult an appropriately certified expert (such as a lawyer, CPA, tax advisor, licensed broker, or HR expert) for advice specific to your circumstances.