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Estimating Income Tax
Income tax amounts to the other half of total taxes owed each year by small business owners. How much you owe is determined by how much you made after expenses and deductions.
This post will show you how to estimate your income taxed owed in equation form.
First, you should determine what tax bracket you will fall into. Your tax bracket is used to estimate the amount of additional tax you’ll pay if your income increases – or the amount you’ll save if you can claim a deduction.
For instance, you are married filing jointly and your taxable net earnings is $55,000.00. You will be taxed at the 15% rate.
Don’t forget: The IRS allows you to deduct half of your estimated self employment tax away from your net earnings.
The equation for estimating your income tax looks like this:
(((Net Earnings – (SEtax / 2)) – Income Min. Limit) * Tax Rate) + Minimum Tax
So assuming your estimated net earnings is $55,000 @ 15% (before deducting SEtax) the equation would be figured as:
((($55,000.00 – ($7,771.25 / 2)) – $14,600.00) * .15) + $1,460.00
((($55,000.00 – $3,885.63) – $14,600.00) * .15) + $1,460.00
(($51,114.37 – $14,600.00) * .15) + $1,460.00
($36,514.37 * .15) + $1,460.00
$5,477.16 + $1,460.00
Income Tax = $6,937.16
With net earnings of $55,000, your estimated total tax owed (incl. self employment tax) would be:
Itax + SEtax = Total Estimated Tax Owed
$6,937.16 + $7,771.25 = $14,708.41
Disclaimer: Tax results submitted to the IRS should be figured by a qualified accounting professional. This method is only for estimating what you will owe to be better prepared.
Related Small Business Buzz Posts:
Estimating Self-Employed Tax
Alternative Minimum Tax
Personal Savings in Decline
Reducing Taxable Income with Retirement Funds
Last Minute Tax Tips