We realize that when it comes to taxes it feels like there's a whole new
language to learn. In an effort to make estimated taxes a little easier
to understand, we've put together the follwing list of terms and
definitions.
Adjusted gross income (AGI) Your gross annual income less allowable adjustments, such as IRA and alimony, for example. In order to pay estimated taxes online, your prior year AGI is needed to verify your identity.
Estimated taxes If you do not pay your tax through withholding, or do not pay enough tax that way, you may have to pay estimated tax. People who are in business for themselves generally will have to pay their tax this way. Also, you may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rent, and royalties. Estimated tax is used to pay not only income tax, but self-employment tax and alternative minimum tax as well.
Credit for withholding and estimated tax When you file your income tax return, take credit for all the income tax withheld from your salary, wages, pensions, etc., and for the estimated tax you paid for that tax year. Also take credit for any excess social security or railroad retirement tax withheld.
Deadlines There are four separate tax deadlines to pay estimated taxes. Normally, the deadlines fall on the 15th on January, April, June, and September. If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the dealine is moved to the next business day. Form 1040es This is the form individual taxpayers are required to use to pay estimated taxes. Safe harbor rule For individuals and families who pay (or should pay) quarterly estimated taxes, there’s a term called “safe harbor” that you should be familiar with because it could save you time and money.
Generally, if you don’t pay the IRS enough taxes, they will charge you interest and payment penalties. However, as long as the amount you pay the IRS this year is as much as you paid the IRS last year, the safe harbor rule ensures that the IRS can’t charge you any penalties or interest.
Self-employed person Someone who operates a business or profession as a proprietor or independent contractor and reports self-employment income on Schedule C. Self-employed individuals are usually required to pay estimated taxes.
Underpayment penalty If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. In most cases, the IRS can figure this penalty for you.
Withholding If you are an employee, your employer probably
withholds income tax from your pay. Tax also may be withheld from
certain other income, such as pensions, bonuses, commissions, and
gambling winnings. The amount withheld is paid to the IRS in your name.
