Our calculations are based on three main things:
- Your self-employment income and deductions—the money you make and the deductions you're allowed for your self-employed work
- Projections of your self-employed income and deductions over the current calendar year
- The tax bracket you're in and the other tax profile info you added during setup
Self-employment income and deductions. This is the most straightforward part of the puzzle. It's the money you make from your self-employed work, minus the deductions you're allowed for that self-employed work.
Projections for the current year. Projections are arguably the murkiest piece of the puzzle. To estimate quarterly tax payments, you need a projection—an educated guess—of yearly self-employed profit.
We look at your current income and deductions to figure the profit. Then we average it and project it forward for the remainder of the year. In other words, the estimates are not just for the income you've actually already made, but for the profit we think you'll make the rest of the year.
As the actual data comes in (those transactions you review and sort), we'll use more of the actual data instead of our projections. At any time, you can check the actual data and make adjustments to our projections from the Quarterly Estimated Taxes page.
Tax bracket and tax profile. Tax brackets are based on income levels and set by the government. During setup, we ask some general questions about your tax situation so we can figure out what tax bracket you're most likely in. We adjust for household income that's already been taxed (for example, if you or spouse is also a W-2 employee for another company), and give you your standard deduction(s). You can check your tax profile info from the Quarterly Estimated Taxes page.
Do the estimated payments seem high?
What can make estimates seem high usually is the idea of projecting profit for an entire year. A tax estimate is not just for the money you've already made, but for the money you'll likely make for the rest of the year.
It can also be higher than expected because self-employed people have to pay both halves of the Social Security and Medicare tax. In contrast, a W-2 employee only pays one half, and the employer pays the other half.
Of course, if you haven't kept on top of reviewing transactions and logging business miles for your car, you may be missing out on deductions. This can make your profit, and in turn your projections and estimates higher.
Keep in mind that our goal is to have you owe no tax for your self-employment work at the end of the year. By paying the amounts we recommend throughout the year, you shouldn’t have to come up with a big pile of money you still owe for self-employment. You’ll have already paid.