Estimated Tax

According to the IRS website, 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 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.

There are different forms that you need to use in order to figure out estimated tax.  If you are a sole proprietor, partner, S-corporation shareholder or self-employed individual, you need to use form 1040-ES in order to figure out and pay your estimated tax.  If you are a corporation, you will need to fill out form 1120-W.

The basic idea is that whichever entity that you are, you need to estimate your taxes for the next year.  You figure out what the deficit will be based on the income that you projected.  If the deficit or the amount of tax owed is going to be greater than $1,000, you need to make payments of 1/4 of the deficit each quarter.  If you end out owing greater than $1,000, you will be penalized for not paying enough estimated tax.  For corporations, this number is greater than $500.

If you have a W-2 job, you can get around having to pay estimated tax by asking your employer to take more taxes out of your paycheck to compensate.

You do not have to pay estimated tax for the current year if you meet all three of the following conditions.
•You had no tax liability for the prior year
•You were a U.S. citizen or resident for the whole year
•Your prior tax year covered a 12 month period

In order to figure out how much estimated tax you need to pay, you need to use the appropriate form to figure out your estimated tax.  To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.  Either you can do this or you can ask your tax professional.  The form will list the amounts that you need to pay the Federal Government and on which due dates.  Each quarter has its own due date that is listed on the form.

Some things to remember is that if you estimated your income incorrectly in the beginning of the year, you need to figure out the estimates again.  There is no need for you to over pay your estimated taxes, especially when the current year does not match your estimates.  If you were owing taxes for last year, you may also have to make payments on last years taxes owed.