We base our calculations on three main things:
Self-employment income and deductions
The money you make minus the deductions you're allowed for your self-employed work.
Projections for the current year
To estimate quarterly tax payments, you need a projection—an educated guess—of yearly self-employed profit.
We look at your average current income and deductions to figure the profit. Then, we project it forward for the rest of the year. The estimates are not for the income you have made, but a prediction of the profit you will make for the rest of the year.
As the actual data comes in (the transactions you encode and review), we will 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
The government sets tax brackets based on income levels. During setup, we ask some general questions about your tax situation to figure out what tax bracket you are in. We adjust for household income that is already been taxed (for example, if you or your 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?
Projections of profit for an entire year makes estimates seem high. A tax estimate is not for the money you have already made, but for the money you will 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 do not review your transactions regularly and log business miles for your car, you may be missing out on deductions. This makes your profit, projections, and estimates higher.
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 will not have a lot of money that you still owe for self-employment.