Estimated Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments using Form 1040-ES.
Estimated Taxes is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated taxes if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Estimated taxes are used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.
Who Must Estimate?
If you had a tax liability for last year, you may have to pay estimated tax for this year.
You must pay estimated taxes for years if both of the following apply.
- You expect to owe at least $1,000 in tax for 2011 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown on your 2011 tax return, or
- 100% of the tax shown on your 2010 tax return. Your 2010 tax return must cover all 12 months.
Sole proprietors, partners, and S corporation shareholders
You generally must make estimated payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES, for Individuals, to figure and pay your estimated tax. For additional information, refer to Publication 505, Tax Withholding, and Estimated Tax.
You generally must make estimated tax payments for your corporation if you expect it to owe a tax of $500 or more when you file its return. Use Form 1120-W, Estimated Tax for Corporations (PDF), to figure the estimated tax. You must deposit the payments. For additional information, refer to Publication 542, Corporations.
Who Does Not Have to Pay Estimated Payments?
If you receive salaries and wages, you can avoid having to pay estimated payments by asking your employer to take more tax out of your earnings. To do this, file a new Form W-4 with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
Estimated Payments not required
You do not have to pay estimated tax for 2009 if you meet all three of the following conditions.
- You have no tax liability for last year
- You were a US citizen or resident for the whole year
- Your current year’s tax year covered a 12-month period
- You had no tax liability for last year if your total tax was zero or you did not have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding.
Estimated tax requirements are different for farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax provide more information about these special estimated tax rules.
How to Figure Estimated Payments?
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 current year estimate, it may be helpful to use your income, deductions, and credits for the prior year as a starting point. Use your prior year federal tax return as a guide. You can use the worksheet in Form 1040-ES to figure your estimated tax. 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 taxes for the next quarter. You want to estimate your income as close as you can to avoid penalties.
You must adjust both for changes in your own situation and for recent changes in the tax law.
When to Pay Estimated Taxes
For tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.
Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL your federal tax payments including federal tax deposits (FTDs), installment agreement, and estimated tax payments using Electronic Federal Tax Payment System (EFTPS). If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can if you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.