Estimated Taxes

Federal Estimated Tax Rules

The following discussion provides a brief overview of the requirements for filing estimated taxes at the federal level. Most states have similar rules but income thresholds will be different and vary from state to state.

Sources Of Income That Usually Require Estimated Tax Payments

If you have income from the following sources you may be required to remit estimated taxes:

• Self-employment income
• Interest
• Dividends
• Alimony
• Rent
• Gains from the sales of assets
• Prizes or awards

Basically independent contractors, sole proprietors, partners and taxpayers with significant passive income or other income usually must set up quarterly estimated taxes.

Requirements For Paying Estimated Taxes

As a general rule, you must pay estimated taxes if both of these tests are applicable to your situation:

1) You expect to owe at least $1,000 in tax after subtracting your tax withholding (if you have any) and credits, and

2) You expect your withholding and credits to be less than the smaller of 90% of your current year taxes or 100% (110% for certain high income taxpayers) of the tax on your prior year return.

Using the prior year tax safe harbor is generally the recommended course of action since it prevents penalties for the current year no matter how much the ultimate liability will be once the return is filed.

Note: For farmers, fishermen, certain household employers and certain higher income taxpayers special rules apply.

Sole Proprietors, Partners and S Corporation Shareholders Usually Must Make Estimated Taxes

For Sole Proprietors, Partners and S Corporation shareholders, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

Calculating Your Estimated Tax

To figure your estimated tax, include your expected gross income, taxable income, taxes, deductions and credits for the year. There is a useful worksheet in Form 1040ES, Estimated Tax for Individuals for making these computations.

You want to be as accurate as possible to avoid penalties. Often times, it is useful to overestimate income and underestimate expenses to make sure that the installments end up being sufficient to avoid penalties.

Also, taxpayers need to consider changes in their tax situation during the year and recent and to be enacted tax law changes.

Four Quarters

The year is divided into four payment periods, or due dates, for estimated tax purposes. Those dates generally are April 15, June 15, Sept. 15 and Jan. 15, except in the rare case when an individual taxpayer has a fiscal tax year.

Use Form 1040ES To Pay

Form 1040ES, Estimated Tax for Individuals, provides instructions, worksheets, schedules and payment vouchers. You can pay estimated taxes by check or money order using the Estimated Tax Payment voucher.

Easier Way To Pay: EFTPS

The easiest way to pay estimated taxes, however, is electronically through the Electronic Federal Tax Payment System or EFTPS.

Pay With Credit Or Debit Card

You can also pay estimated taxes by credit or debit card.

Warning:

There is no shortcuts here. You must crunch the numbers to determine where you stand and to insure against penalties for underpayments of estimated taxes.

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