Many federal income taxes are paid from amounts that are withheld from payments to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and paid over to the government by the employer. In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, or other funds that are not subject to withholding.
Estimated income tax payments are required from taxpayers who:
- expect to owe at least $1,000 in tax for the year, after subtracting taxes that were paid through withholding and tax credits; and
- expect that the amount of taxes to be paid during the year through other means will be less than the smaller of—
- 90% of the tax shown on the current year's tax return, or
- 100% of the tax shown on the previous year's return (the previous year's return must cover all 12 months). This 100-percent test increases to 110 percent if the taxpayer's AGI for the previous year exceeds $150,000.
U.S. citizens who have no tax liability for the current year are not required to make estimated tax payments.
Form 1040-ES. Taxpayers use Form 1040-ES to calculate, report and pay their estimated tax. The annual liability may be paid in quarterly installments that are due based upon the taxpayer's tax year. However, no payments are required until the taxpayer has income upon which tax will be owed. Taxpayers may also credit their overpayments from one year against the next year's estimated tax liability, rather than having them refunded.
Generally, the required installment is 25 percent of the required annual payment. However, a taxpayer who receives taxable income unevenly throughout the year can elect to pay either the required installment or an annualized income installment. The use of the annualized income installment method, provided on a worksheet contained in the instructions to Form 2210, Underpayment of Estimated Tax by Individuals and Fiduciaries, may reduce or eliminate any penalty for underpaid taxes.
Due Dates. For most individual taxpayers, the quarterly due dates for estimated tax payments are:
|For the Period:||Due date:|
|January 1 through March 31||April 15|
|April 1 through May 31||June 15|
|June 1 through August 31||September 15|
|September 1 through December 31||January 15 next year|
Penalties. A penalty generally applies when a taxpayer fails to make estimated tax payments, pays less than the required installment amount, or makes late payments. However, the IRS may waive the penalty if the underpayment was due to casualty, disaster or other unusual circumstances.