Income taxes are known as a "pay as you go" tax. For most taxpayers, this generally occurs automatically through income tax withholding on your paycheck. However, for any income that you have that is not subject to withholding, such as self-employment income, there is no automatic withholding. Estimated tax is the method that is used to manually pay tax on income so that you are in compliance with the "pay as you go" tax standard. In other words, you need to make estimated taxes if your income tax withholding will not be sufficient to cover your tax liability.
If you do not pay enough tax through withholding or estimated taxes, you may be charged a penalty. You should use Form 1040-ES, Estimated Tax for Individuals to calculate and pay your estimated tax. To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions and credits for the year.
In most cases, you must pay estimated tax for 2011 if both of the following apply:
1. You expect to owe at least $1,000 in tax for 2011, after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:
a. 90% of the tax to be shown on your 2011 tax return, or
b. 100% of the tax shown on your 2010 tax return.
If you receive salary or wages from an employer, you may avoid having to pay estimated taxes by increasing your withholding with your employer. To do this, file a new Form W-4, Employee's Withholding Allowance Certificate, with your employer.
For more information and resources on Estimated Taxes, please see Publication 505, Tax Withholding and Estimated Tax or contact your local income tax preparation office for assistance.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.