Ransford Alda is a self-employed security consultant with estimated annual earnings of $90,000. His social security tax rate is 12.4%, Medicare is 2.9%, and his federal income tax rate 14%. How much estimated tax must Ransford send to the IRS each quarter?
To calculate the estimated tax that Ransford must send to the IRS each quarter, we need to determine the total amount of self-employment taxes and federal income tax.
1. Self-employment taxes:
The Social Security tax rate for self-employed individuals is 12.4% of their net self-employment income. Since Ransford's estimated annual earnings are $90,000, we can calculate his self-employment tax as follows:
Self-employment tax = Net self-employment income * Social Security tax rate
= $90,000 * 0.124
= $11,160
Additionally, there is a Medicare tax of 2.9% that Ransford must pay on his net self-employment income. Let's calculate this:
Medicare tax = Net self-employment income * Medicare tax rate
= $90,000 * 0.029
= $2,610
Therefore, the total self-employment taxes that Ransford must pay are:
Self-employment taxes = Social Security tax + Medicare tax
= $11,160 + $2,610
= $13,770
2. Federal income tax:
Ransford's federal income tax rate is 14% of his estimated annual earnings. Let's calculate his federal income tax:
Federal income tax = Estimated annual earnings * Federal income tax rate
= $90,000 * 0.14
= $12,600
Now, to determine the quarterly estimated tax payments, we divide the total tax amount by four:
Quarterly estimated tax = (Self-employment taxes + Federal income tax) / 4
= ($13,770 + $12,600) / 4
= $6,592.50
Therefore, Ransford must send an estimated tax payment of $6,592.50 to the IRS each quarter.