Estimated taxes are tax payments made to the IRS on income you have that is not subject to withholding. Estimated tax is used to pay your income taxes, as well as other taxes and amounts that you report on your tax return. Not setting aside enough for your tax payments may result in penalties or fees. When you set aside more than is needed to cover your tax payments, you lose the ability to use that money until your refund is received. To avoid estimated tax payments, the withholding on your W-4, Employee’s Withholding Allowance Certificate, must be changed.
Who pays estimated tax?
- If filing as a sole proprietor, partner, S corporation shareholder, or a self-employed individual, tax payments are generally made if you expect to owe more than $1,000 in taxes.
- If filing as a corporation, tax payments are typically made if you expect to owe more than $500 in taxes.
- If you had a tax liability last year, you may have to pay estimated tax for this year.
Who does not pay estimated tax?
You do not have to pay estimated tax if:
- you had no tax liability last year,
- you were a U.S. citizen or resident for the entire year,
- and your prior tax year covered a 12-month period.
To pay estimated taxes, you need to figure out how much your adjusted gross income will be for the year. Take into account your taxable income, deductions, taxes and credits. You can pay your estimated tax four times a year (based on the IRS dates specified for payment), or monthly. The IRS has set up the Electronic Federal Tax Payment System (EFTPS) to make it easier to make your estimated tax payments.
Refer to our Tax Glossary for a complete list of definitions and explanations of commonly used tax terms.
Updated for 2016 Tax Year