How to Calculate Estimated Taxes for a Tax Extension

When it comes to tax extensions, a critical step often gets overlooked: calculating your estimated taxes. It's not just about getting extra time to file – it's also about accurately figuring out how much tax you owe to avoid penalties later on. This is especially relevant for people with varied income streams, like freelancers, or anyone experiencing significant financial changes from the previous year.

This guide will break down the process of calculating estimated taxes for an IRS tax filing extension. We’ll start by clarifying what a tax extension really means, and then move on to how to estimate your taxes. You'll get a step-by-step method to work out your tax liability, along with some pointers on submitting your payment.

This post aims to provide you with the essential information, without fuss or muss, so you can handle your tax extension confidently and with minimal stress.

Understanding Tax Extensions

What is a Tax Extension?

A tax extension is a request for more time to file your federal income tax return. The key point here is that it’s about filing, not paying. You’re asking the IRS for an additional six months to submit your paperwork, which moves the deadline from April 15th to October 15th. Remember, this doesn't grant extra time to pay any taxes you owe.

Who Can Apply for a Tax Extension?

Anyone can apply for a tax extension, and the process is surprisingly simple. You don’t need to explain why you need more time; the IRS grants this automatically if you file the proper form (Form 4868). It's a useful option if you're still gathering financial documents or dealing with unexpected life events. Form 4868 is your go-to solution for scoring an extra six months—no stress, no drama, just more breathing room.

Tax extensions are helpful for buying extra time to file your return, but they don't alleviate your responsibility to pay what you owe by the original deadline.

In the next section, we’ll explore estimated taxes and why they're important in the context of a tax extension.

Understanding Estimated Taxes

Definition: Estimated taxes are periodic payments made towards your expected tax liability. They are crucial for individuals who don't have taxes withheld from their income, such as freelancers, self-employed individuals, or those with significant investment income.

Purpose: The IRS operates on a 'pay-as-you-go' system. If you don’t have taxes withheld from your income or withholding doesn't cover your full tax liability, you’re expected to make these payments. It ensures you cover your tax liability throughout the year, rather than paying a lump sum at year-end.

Why Are Estimated Taxes Important?

Avoiding Penalties: Failing to make estimated tax payments or underpaying these taxes can lead to penalties.

Cash Flow Management: Estimated tax payments help manage cash flow for individuals with irregular incomes, like freelancers or small business owners, by spreading tax payments throughout the year.

Tax Extension Implications: When you file for an income tax extension, you only extend the deadline to file your tax return, not the deadline to pay your taxes. Thus, accurately calculating and paying estimated taxes by the original deadline (April 15th) with your tax extension is vital to avoid interest and penalties.

Now, let’s walk through how to calculate your estimated taxes, step-by-step.

How to Calculate Your Estimated Taxes

Calculating your estimated taxes might seem intimidating, but it’s manageable once you break it down. Here’s how you can do it.

A. Determining Your Expected Annual Income

Start by estimating your income for the year. This includes all earnings from self-employment, freelancing, investments, rental properties, and any other sources without tax withholdings.

Example: Let’s say you're a freelance graphic designer. Your estimated earnings are $50,000 this year from various projects.

B. Calculating Taxable Income

Start by estimating how much you expect to earn for the year, then subtract your business-related expenses—things like office supplies, design software, or even your self-employed health insurance. That gives you your net self-employment income.

Suppose you bring in $50,000 and have $10,000 in expenses. That leaves you with $40,000 in net income. But hold on—before you get to your taxable income, you need to calculate self-employment tax.

The IRS doesn’t tax the full $40,000—just 92.35% of it, totaling $36,940. At a 15.3% self-employment tax rate, that’s $5,651.82.

Now here’s where it gets a bit better: you can deduct half of that tax—$2,825.91—when figuring out your adjusted gross income (AGI). So instead of $40,000, your AGI would be $37,174.09.

Finally, if you’re filing as single for the 2025 tax year (returns due in April 2026), the standard deduction for single filers is $15,750. Subtracting that from your AGI of $37,174.09 brings your taxable income to $21,424.09.

C. Applying the Current Tax Rates

Now, apply the tax rates to your taxable income. You can find the latest tax brackets on the IRS website or use an online tax calculator for this.

Using 2025 tax brackets, the first $11,925 is taxed at 10%, totaling $1,192.50. The remaining $10,249.09 is taxed at 12%, totaling $1,229.89. The total estimated income tax is $2,422.39.

Note: The U.S. uses a progressive tax system, so only the income over each bracket threshold is taxed at the higher rate.

D. Accounting for Self-Employment Tax

Remember to include self-employment tax, which covers Social Security and Medicare if you're self-employed. As of the last update, this rate is about 15.3%. However, the taxable amount is 92.35% of your net earnings.

For our example: 15.3% of $36,940 is $5,651.82.

E. Adding It All Up

Add your income tax estimate to your self-employment tax to get your total estimated tax.

In our example: $2,422.39 (income tax) + $5,651.82 (self-employment tax) = $8,074.21.

F. Dividing Into Quarterly Payments

Finally, divide your total estimated tax by four to get your quarterly payment amount.

For our example: $8,074.21 ÷ 4 = $2,018.55 per quarter.

There's a simpler way of calculating quarterly estimated tax payments, called the Safe Harbor Rule. Based on the rule, you get the total tax you paid the previous year and divide the amount by four. If your AGI is over $150,000, you must use 110% of the prior year's tax liability.

Who Needs to Pay Quarterly Estimated Tax Payments?

A taxpayer must owe at least $1,000 for the current year after subtracting withholding and refundable credits. In addition, they expect their withholding and refundable credits to be smaller than:

• 90% of the tax shown on the current year's tax return, or
• 100% of the tax shown on the previous year's tax return.

Estimated Tax Deadlines

The quarterly deadlines for making estimated tax payments are as follows:

1st Payment: April 15th

2nd Payment: June 16th

3rd Payment: September 15th

4th Payment: January 15th of the following year

If any of these dates fall on a weekend or holiday, the deadline gets pushed to the next business day.

Help From E.file-tax.net

Now that you know how to calculate your estimated taxes, you're much better prepared to file a tax extension to get an additional 6 months to file your taxes. Get started here.

Submitting Your Estimated Tax Payment

Submitting your estimated tax payments is a straightforward process, and you have several options:

Online Payments Through IRS Direct Pay: You can pay directly from your bank account for free using the IRS Direct Pay system. This method is secure and provides immediate confirmation of your payment.

Electronic Federal Tax Payment System (EFTPS): EFTPS is another practical electronic payment option for business owners. You'll need to enroll in this system in advance, and once registered, you can schedule payments up to 365 days in advance.

Mobile App: The IRS2Go app allows you to make payments directly from your mobile device.

Credit or Debit Card Payments: You can also pay via credit or debit card through third-party payment processors. Note that there may be a convenience fee associated with these services. 

Mailing a Check or Money Order: 1040-ES payment voucher.

Conclusion

There you have it! Estimated taxes and IRS extensions don’t have to be a headache. When it’s time to file, skip the stress and sign up at e.file-tax.net—the smarter, faster way to apply for a tax extension. We make the process simple, painless, and (dare we say) almost fun.