Income tax is compulsory for anyone who makes an income from a job, self-employment, or other sources. The IRS’ ‘pay as you go’ system means that they expect to receive regular tax payments from you as your income is earned, not just at the end of the year when you file a tax return.
Usually, for employees, applicable taxes are deducted automatically from their salary and sent to the IRS. This is referred to as ‘withholding taxes’. Others need to make their payments in the form of Estimated Tax – 4 payments to the IRS based on what they earn throughout the tax year.
What Is Estimated Tax?
Paying tax on income from which tax is not deducted by your employer is known as Estimated Tax. Estimated tax is expected by the IRS from people who do not withhold tax throughout the year. Estimated tax is calculated on income from self-employment, business earnings, interest, rent, dividends etc.
According to the requirements of the IRS, estimated tax is to be paid on a quarterly basis, usually in four equal installments. Paying lower than the estimated amount of tax will result in you having to issue bigger checks to the IRS during tax season while paying higher than the estimated amount will result in the additional amount being returned to you as a tax refund.
Who Must Pay Estimated Taxes?
Whether you need to pay your quarterly estimated tax depends on several factors.
In general, if you owed a tax liability of $1,000 or more in the previous tax year, the IRS requires you to make estimated tax payments. You have an obligation to the IRS to either have more tax withheld from your income or pay the estimated tax the following year.
Estimated tax payments are commonly required to be paid by people in the following categories:
- Individuals who are self-employed or sole proprietary owners of a business. Estimated tax payments should be made by people who earn their income from their own business in case that their tax liability is forecasted to be over $1,000 for the year. Both part-time and full-time business operate under this rule.
- Associates, Corporations, and S Corporation Shareholders. Salaries or income earned from owning a business will generally require estimated tax payments. In terms of corporations, estimated tax payments are expected when the said corporation expects at least $500 in tax liability.
- Individuals Owing Taxes for the Preceding Year. If you had an obligation to pay taxes at the end of last year, it likely means that too little was withheld from your paycheck or other incomes increased your tax liability. If this happens, the IRS may request you to pay estimated tax.
How to Make Estimated Tax Payments
To calculate and pay estimated tax, you should make use of the IRS Form 1040-ES (Estimated Tax For Individuals).
Much in the same manner your yearly tax return is filed, your income, deductions, credits, and paid taxes must also be put together in order to figure out the estimated tax amount you have to pay. In order to estimate the amount you will owe next year, the majority of individuals can view their income/liability statistics from the preceding year via the IRS website.
The year is divided into 4 payment periods when it comes to estimated tax. There are specific payment deadlines for each pay period. If you fail or delay to pay on time, the IRS can and will charge you penalties:
- January 1 — March 31: Deadline is April 15
- April 1 — May 31: Deadline is June 16
- June 1 — August 31: Deadline is September 15
- September 1 — December 31: Deadline is January 15 (of the following year)
Keep in mind that it is necessary to pay your taxes on time. Installments for estimated tax that you missed must be done as soon as possible.
Look into IRS Publication 505 (Tax Withholding and Estimated Tax) for further information.
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