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.
You must pay estimated tax for 2010 if you had a tax liability for 2009 and both of the following apply: you expect to owe at least $1,000 in tax for 2010 after subtracting your withholding and credits, and you expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2010 tax return, or 100% of the tax shown on your 2008 tax return.
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 2010 estimated tax, it may be helpful to use your income, deductions, and credits for 2009 as a starting point. Use your 2009 federal tax return as a guide. You can use the worksheet in Form 1040-ES (PDF) 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.
For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. Generally, estimated tax payments are due on April 15, June 15, September 15, and January 15. 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 of 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, as long as 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.
Please contact me for a free consultation and evaluation of your need to pay estimated tax payments.
