If you earn income that isn’t subject to automatic tax withholding—like freelance work, gig jobs, or small business income—you’ll likely need to pay estimated taxes. Figuring out how much to pay can feel overwhelming, but it’s manageable when you follow a simple process. Here’s how to estimate your tax bill step by step:
Start by calculating how much income you expect to earn for the year. This includes all sources of income: self-employment earnings, side hustles, rental income, investments, or any other untaxed sources. Be as accurate as possible—your estimate helps ensure you pay enough without overpaying.
Next, subtract any deductions you’re eligible for. These reduce your taxable income and might include the standard deduction (a fixed amount based on your filing status) or itemized deductions like mortgage interest, charitable contributions, and business expenses. Self-employed individuals can also deduct things like home office expenses, mileage, and health insurance premiums.
After determining your taxable income, apply your tax rate. Federal tax rates are progressive, meaning different portions of your income are taxed at different rates. For simplicity, many people use an estimated effective tax rate—a blended average rate that reflects how much tax you’ll pay overall. This might range from 10% to 30% depending on your income level.
If you’re self-employed, you’re also responsible for self-employment tax, which covers Social Security and Medicare. The rate is 15.3% on 92.35% of your net earnings. This amount is added on top of your income tax.
Finally, subtract any tax credits you qualify for. Unlike deductions, credits directly reduce your tax bill. Common credits include the Child Tax Credit, education credits, or credits for energy-efficient improvements.
Let’s say you expect to earn $60,000, have $12,000 in deductions, use a 20% tax rate, owe $8,000 in self-employment tax, and have $1,000 in credits:
Tax Estimate = [($60,000 – $12,000) × 20%] + $8,000 – $1,000
Tax Estimate = [$48,000 × 20%] + $8,000 – $1,000 = $9,600 + $8,000 – $1,000 = $16,600
Knowing how to estimate your taxes helps you avoid penalties and plan your finances wisely.
