Law FAQ: What is an estimated tax payment, and who is required to make them?

What is an estimated tax payment?

Estimated tax payment is the method used to pay tax on income that is not subject to withholding.  Functionally-speaking, you can view estimated tax payments as a substitute for employer withholding for any income you might receive for which there is no “employer” who is withholding taxes out of your paycheck.  For example, if you are self-employed, or if you earn meaningful income from side jobs for which there is no employer who is withholding taxes, then you would generally be required to make quarterly estimated tax payments as to that income.

Who is required to make an estimated tax payment?

From the IRS website: “If you [file your tax return] as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.”

If you are a salaried employee who has filled out your W-4 form correctly, and you are having the appropriate amount withheld from your check each pay period, then you are generally not required to make estimated tax payments.  However, if you have a side job where you are essentially self-employed (for example: doing odd jobs, cutting grass on weekends, etc.) and you receive a meaningful amount of income for which there is no employer withholding, then you may be required to make quarterly estimated payments, or to adjust your employer withholding to make up the extra difference.  You can use the worksheet on IRS Form 1040ES to determine whether you might owe estimated tax payments.

When are estimated tax payments due?

There are four payment periods, and each period has a different due date depending on the year.  The remaining due dates for 2011 taxes are Thursday, September 15, 2011, and Tuesday, January 17, 2012.  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.  In other words, you can’t skip or underpay on one of the payment dates.

What happens if you are required to pay estimated taxes but fail to do so?

From the IRS website: “If you did not 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.”

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