Short of hiring an accountant, the easiest way to estimate your taxes is by calculating your Effective Tax Rate. Your Effective Tax Rate is the percentage of the money you earn that you pay towards income taxes. This estimate works particularly well if you earn about the same amount of money every year.
To determine your Effective Tax Rate, take the total amount of tax you paid in the previous year and divide it by the total amount of money you earned that year. The answer will be a percentage. That percentage is your Effective Tax Rate. Then, multiply that number by the amount of money that you plan on making in the current or upcoming year. The answer will be the approximate amount of money you will pay for income taxes for that year. If you want to know how much to have withheld from your paycheck, just divide that number by the number of paychecks you receive every year.
For example, if you made $100,000 last year and paid $20,000 in tax, your Effective Tax Rate would be 20% ($20,000 / $100,000 = 20%). As a side note, it’s generally a good idea to increase this by 1%-2% so you don’t underpay your taxes in a given year but to keep the math simple we’ll continue using 20%.
If you plan on making $110,000 this year, multiple $110,000 by 20% (which is your Effective Tax Rate). This gives you $22,000, which is the amount of tax you will probably pay this year. If you are paid twice a month, divide this number by 24 and you will know how much money you need to tell your employer to withhold from your paycheck, which is $916 in this case ($22,000 / 24 = $916). If you live in a state that has state income tax you should do this for your state as well.
CAUTION: This method works best for people that are paid by pages (e.g., a salary, a dollar amount per hour, etc.) If your income changes drastically from year to year this will not work! The federal government and most states structure their taxes so that the percentage of your money you pay toward income taxes increases as you make more money. That means if you are going to make a lot more money than last year, you will most likely pay a larger percentage of that money in tax. Conversely, if you are going to make a lot less money than last year, you will most likely pay a smaller percentage of your income in tax. For example, if you make $100,000 you might pay 20% of it toward income taxes versus if you make $200,000 you might pay 30% of it toward income taxes. Also, this will not work if the government changes the tax structure in the prior or current year or most of your income comes from dividends or capital gains.
If you don’t know how much money you made last year, look in Box 5 of your W-2 (if you receive a salary) that says “Medicare wages and tips.” This box will have the total amount of money you earned from that employer. If you received multiple W-2’s, add up the numbers in this box. You can also find this information on Line 1 of the first page of your 1040 (which is the form you use to pay your federal income taxes.)
If you don’t know how much tax you paid last year look on Line 63 of page 2 of your 1040 (which is the first two pages of your Federal tax return), which says “Add lines 52 through 62. This is your total tax.“ The number to the right of this is the amount of tax you owed the Federal government for that year. If you filed a state tax return there should be a similar line on your state tax return that tells you the total tax you owed the state for that year. Add these two numbers and you will have the total amount of income tax you owed last year.