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Estimated Taxes

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Estimated Taxes

Estimated tax 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 tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is 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.

Be sure to keep an accurate record of your estimated tax payments so you can claim credit for them when you file your return.

Who must pay: The general rule is you have to pay estimated tax if your withholding doesn't cover 90% of your tax liability. But there are exceptions:

  • No estimates are required if the amount due after subtracting withholding and credits will be less than $1,000.
  • In general, no estimates are required if your withholding and credits add up to at least as much as your prior year's tax.

Voluntary payments: Some people choose to make estimated tax payments even when the payments aren't required. This approach deprives you of the opportunity to earn interest on the amount you prepaid, but assures that you won't have a crushing tax bill on April

Panelty for underpayment: If you don't pay enough estimated tax, or don't pay on time, you'll have to pay a penalty. It's best to avoid this penalty, of course - but you don't have to lose sleep over it. The penalty is equivalent to nondeductible interest on the amount you underpaid, for the period of the underpayment. If you underpay only a small amount, or you correct the underpayment quickly, the penalty will be small.

Due Dates: For nearly all taxpayers, the due date for the first estimated tax payment of each year is April 15 - the same day the return is due for the previous year. Subsequent payments are due June 15, September 15, and January 15 of the following year. - 10 Successful Years
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