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Taxes must be paid as you earn or receive income during the year, either through withholding or estimated tax payments. If the amount of income tax withheld from your salary or pension is not enough, or if you receive income such as interest, dividends, alimony, self-employment income, capital gains, prizes and awards, you may have to make estimated tax payments.
If you are in business for yourself, you generally need to make estimated tax payments. Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax.
If you don’t pay enough tax through withholding and estimated tax payments, you may be charged a penalty.
You also may be charged a penalty if your estimated tax payments are late, even if you are due a refund when you file your tax return.
Estimated tax requirements are different for farmers, fishermen, and certain higher income taxpayers.
Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.
Corporations generally have to make estimated tax payments if they expect to owe tax of $500 or more when their return is filed. N.B: You may have to pay estimated tax for the current year if your tax was more than zero in the prior year.
If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings.
In order to do this you have to complete Form W-4 so that your employer can withhold the correct federal income tax from your pay. Consider completing a new Form W-4 each year and when your personal or financial situation changes. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.
You don’t 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 if your total tax was zero or you didn’t have to file an income tax return.
For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.
Individuals, including sole proprietors, partners, and S corporation shareholders, generally use Form 1040-ES, to calculate estimated tax.
To calculate your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. It may be helpful to use your income, deductions, and credits for the prior year as a starting point. We will be happy to assist with these calculations.
Corporations generally use Form 1120-W, to calculate its estimated tax.
For estimated tax purposes, the year is divided into four payment periods. You may send estimated tax payments with Form 1040-ES by mail, or you can pay online or by phone.
Using the Electronic Federal Tax Payment System (EFTPS) is the easiest way for individuals as well as businesses to pay federal taxes. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS. If it’s easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you’ve 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.
Corporations must deposit the payment using the Electronic Federal Tax Payment .
For additional information, refer to Publication 542, Corporations.
If you didn’t 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. There are special rules for farmers, fishermen, and certain higher income taxpayers.
However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210, Underpayment of Estimated Tax by Individuals, Estates and Trust, to see if you owe a penalty for underpaying your estimated tax.
The penalty may also be waived if:
Coronavirus Aid, Relief, and Economic Security (CARES) Act permits self-employed individuals making estimated tax payments to defer the payment of 50% of the social security tax on net earnings from self-employment imposed for the period beginning on March 27, 2020 and ending December 31, 2020. This means that 50% of the social security tax imposed on net earnings from self-employment earned during the period beginning on March 27, 2020, and ending December 31, 2020, is not used to calculate the installments of estimated tax due.