If you are self-employed, or have other sources of income in addition to a salary or wages, such as dividends, interest, capital gains, rents and royalties, you may have to make estimated federal income tax payments during the year. Estimated tax payments are required when your withholding tax is not sufficient to cover your tax liability. Payments are made based on your estimated tax liability for the year, less your withholding taxes. There are four periods for reporting and paying estimated tax. When you file your income tax return at the end of the year, these estimated tax payments, plus any income tax withheld, are credited against your tax liability based on your actual income for the year, to determine whether you are due a refund or owe additional tax.
What are Estimated Federal Income Tax Payments?
U.S. federal income tax is a pay-as-you-go tax, and must be paid during the year either through withholding or estimated tax payments. If your withholding tax is not sufficient to cover your tax liability, or if you have sources of taxable income that are not subject to withholding, you may have to make estimated tax payments.
If you do not pay enough tax during the year, either through withholding or estimated tax payments, you may be subject to an underpayment penalty when you file your income tax return. Estimated tax payments are made in four periods during the year, and each period has a specific payment due date. If you do not pay enough tax by the due date for each of the payment periods, you may be charged a penalty for that period, even though you have paid enough tax to cover your total tax liability for the year and are due a refund when you file your return.
Who Is Subject to Estimated Payments?
In general, you do not have to make estimated tax payments if you expect that your Form 1040 or 1040A for this year will show a tax refund or a tax balance due of less than $1,000.
Tax Withholding and Estimated Tax Payments
If all your taxable income is subject to withholding, and enough tax is being withheld, you will probably not need to make estimated tax payments. If you did not have a tax liability last year, and you do not have any significant changes in the level or source of your income in the current year, your withholding will probably be sufficient to cover your tax liability this year. But if you have a significant increase in your income, or you begin to receive income from sources that are not subject to income tax withholding, you may need to make estimated payments.
Self-Employed
If you are in business for yourself, you will not have income tax withheld from your earnings, and you are responsible for estimating your tax liability and making estimated tax payments. For self-employed taxpayers, the estimated payments include both federal income tax and self-employment tax (equivalent of social security and Medicare) on your earnings.
Tip Income
If you receive $20 or more a month in tips on your job, you must report the total amount of tips you receive to your employer, so that social security, Medicare, and federal income tax can be withheld. If the amount of your regular pay is not enough to cover these withholding taxes, you can give your employer money to make up for the shortage. If you do not report your tips, or you do not cover the shortage in your withholding, you may have to make estimated tax payments.
Household Worker
If you are a household worker, tax is withheld from your pay only if you ask your employer to withhold it, and your employer agrees. If tax is not withheld, you will need to make estimated tax payments.
Sick Pay
If you receive sick pay from a third party, such as an insurance company, you must ask to have income tax withheld, by completing Form W-4S. If you do not, you may need to pay estimated tax on your sick pay.