What Are Estimated Taxes? |
Estimated taxes, also known as quarterly taxes or quarterly estimated tax payments, is the method used to pay any tax on income that is not subject to withholding.
To put it more simply, any income you receive is generally subject to income tax. For most individuals who work for an employer, your income tax is withheld from your paycheck and sent to the IRS and/or state government by your employer. The amount of your withholding is determined by a few factors, which are captured in a W-4 you should have filled out when you were hired.
For other income that you may have (including income from self-employment, interest & dividends, alimony, rental income, gains from the sale of stocks and assets, prizes and awards), no tax withholdings are made. When this is the case, you are generally required to make quarterly tax payments to the IRS. These payments are due to the IRS 4 times a year – hence the term quarterly tax payments, although the dates aren’t evenly spaced. Payments are due on January 15, April 15, June 15, and September 15 and can be submitted to the IRS through IRS 1040-EZ or using an online provider like Easy Estimated Taxes.
If you do not pay enough of your taxes owed through withholding or estimated tax payments, you may be charged a penalty by the IRS. Furthermore, if you do not pay enough by the due date of each quarterly tax payment period, you may be charged a penalty even if you are due a refund when you file your tax return.
For 2011, you must pay estimated taxes if both of the following apply, or you will be subject to payment penalties:
- You expect to owe at least $1,000 in tax for 2009 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of:
90% of the tax to be shown on your 2011 tax return, or
100% of the tax shown on your 2010 tax return. Your 2010 tax return must cover all 12 months.
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