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Remember how back in the beginning of Tax Basics we talked about withholding and how it’s an integral part of the federal income tax pay-as-you-earn philosophy? Well, Uncle Sam is committed to that idea of collecting income tax on your earnings as you receive them, even in cases where there’s no arrangement to have them withheld.
Tax generally is not withheld from alimony, interest, dividends, rental income, self-employment income and capital gains. However, since this money is taxable, you may be required to pay estimated tax on these types of income to avoid coming up short at tax-filing time.
Estimated tax is the method of paying tax on income that is not subject to withholding or from which not enough tax has been withheld. The system was designed to ensure that taxpayers who have a lot of non-withholding income pay into the tax system regularly to even things up between them and wage earners who lose a chunk of money each paycheck to taxes.
Timing of estimated filing
Estimated tax payments are made four times a year by filing Form 1040-ES:
|Estimated tax due:
|For income received:
|Jan. 1 through March 31
|April 1 through May 31
|June 1 through Aug. 31
|Sept. 1 through Dec. 31
|If the due date falls on a Saturday, Sunday or legal holiday, you have until the next business day to make the payment. The filing is considered on time if postmarked by the due date.
The IRS prefers you figure the total amount of estimated tax you’ll owe on April 15, divide it by four and send in equal payments according to the schedule. There’s a worksheet with the 1040-ES package to help you do just this.
You do not have to make estimated tax payments if your prior year’s tax return shows a refund or a balance due of less than $1,000.