You must pay taxes as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive other income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.If you are in business for yourself, you generally need to make estimated tax payments.
If you don’t pay enough tax, you may be charged a penalty. You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
Note: Estimated tax requirements are different for farmers and fishermen. You can find info in Publication 505 Tax Withholding and Estimated Tax for more information about these special estimated tax rules.
Individuals who expect to owe tax of $1,000 or more when their return is filed usually have to make estimated tax payments. This includes sole proprietors, partners, and S corporation shareholders.
In addition corporations usually have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed.
You may have to pay estimated tax for the current year if your tax was more than zero in the prior year. Forms 1040-ES, Estimated Tax for Individuals (PDF), and Form 1120-W Estimated Tax for Corporations (PDF), list details on who must pay estimated tax.
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. Simply file a new Form W-4 with your employer and indicate the additional amount you want your employer to withhold.
You do not have to pay estimated tax for the current year if you meet all three of the following conditions.
1. You were a U.S. citizen or resident for the whole year.
2. You had no tax liability for the prior year. (You had no tax liability for the prior year if your total tax was zero or you didn’t have to file an income tax return.)
3. Your prior tax year covered a 12-month period.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES (PDF), to figure estimated tax.
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
When figuring your estimated tax for the current year, it may be helpful to refer to your income, deductions, and credits for the prior year as a starting point. You need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties.
Refer to Publication 505, Tax Withholding and Estimated Tax for additional information on how to figure your estimated tax.
Corporations may use Form 1120-W (PDF), to figure estimated tax.
For estimated tax purposes, the year is divided into four payment periods-quarterly taxes, with each period having a payment due date. If you pay enough tax by the due date of each of the payment periods, You may be charged a penalty even if you’re due a refund when you file your income tax return if you do not pay enough tax by the due date.
You may pay your estimated taxes weekly, bi-weekly, monthly, as long as you’ve paid enough in by the end of the quarter. Using the Electronic Federal Tax Payment System (EFTPS), you can access a history of your payments, so you know how much and when you made your estimated tax payments.
Corporations must deposit the payment using the Electronic Federal Tax Payment System (EFTPS). For additional information, refer to Publication 542, Corporations.
If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. Again, there are special rules for farmers and fishermen.
If your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments.
The penalty may also be waived if the failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or you retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.