Estimated taxes refer to the method that taxpayers use to pay income tax on income that is not subject to withholding by an employer. The most common income for which a taxpayer must pay estimated taxes is self-employment income, but income for which one must pay estimated taxes may also include alimony, awards, dividends, gains from the sale of an asset, gambling winnings, interest, and rent.
Who must pay estimated taxes?
If you own or participate in a partnership, S corporation, or a sole proprietorship, or you are otherwise self-employed, and you anticipate owing $1,000 or more in income tax, you typically have to pay estimated taxes. If you own or participate in a corporation, you typically have to pay estimated taxes if you anticipate owning $500 or more in income tax.
In addition, if you owed a tax liability in the previous tax year, you typically need to pay estimated taxes for the current tax year.
Who is not required to pay estimated taxes?
If you receive a salary or wages from an employer, you can avoid paying estimated taxes by ensuring your employer withholds enough tax from your income to cover your tax liability. If you wish to change the amount of withholding your employer keeps from your income, you can change the withholding by filing Form W-4 with your employer.
In addition, you do not have to pay estimated taxes if you meet all of the following conditions:
- You had no tax liability for the previous tax year,
- You were a citizen or resident of the United States for the entire tax year, and
- Your previous tax year covered the entire 12-month calendar year.
When do you pay estimated taxes?
Estimated taxes are paid quarterly as follows:
- For the period from January 1 through March 31, estimated taxes are due April 15
- For the period April 1 through May 31, estimated taxes are due June 16
- For the period June 1 through August 31, estimated taxes are due September 15
- For the period September 1 through December 31, estimated taxes are due January 15 of the following calendar year
How do you pay estimated taxes?
If you own or participate in a partnership, S corporation, or a sole proprietorship, or you are otherwise self-employed, you can use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay estimated taxes. If you own or participate in a corporation, you can use Form 1120-W, Estimated Tax for Corporations, to calculate and pay estimated taxes.
Both of these forms include instructions on how to pay estimated taxes online, by phone, by mail, or using a debit or credit card.
What happens if you do not pay a sufficient amount on time for estimated taxes?
If you do not make sufficient estimated tax payments each quarter by submitting the appropriate forms or through withholding by your employer, you will be subject to paying a penalty.
In certain circumstances, such as when the taxpayer experiences a disaster or other casualty or the taxpayer becomes disabled during the tax year, the taxpayer can seek a waiver of the estimated tax penalty. Typically, the taxpayer must request a waiver of the penalty by submitting Form 2210.
Where can you go for help in following the tax law related to estimated taxes?
A tax attorney is a good resource to turn to when you need help calculating your estimated taxes and following all of the requirements of the tax law related to estimated taxes.
By completing the form below this article or calling the telephone number located at the top of this web site, you can speak with a tax attorney to get the help that you need. Remember that all conversations with your tax attorney are confidential and the initial conversation is free of charge, so make the call today to get started.
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Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.