Estimated tax. Another IRS headache.Mar 02 '01 (Updated Mar 06 '01) Write an essay on this topic.
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The Bottom Line If you have significant income from other than employment, you may have to make quarterly estimated tax payments to satisfy the IRS.
The federal and state income tax systems work on a "pay as you go" basis. As you earn money, you're supposed to pay into the system enough to cover your taxes. Most taxpayers have no say in the matter because their employers simply deduct withholding taxes from their paychecks and turn the money over to the taxing authorities on their behalf. But, there are plenty of people who have income from sources other than working for someone else, for example self-employment, pension, annuity and retirement account distributions and investment income. The IRS requires people with these types of income to estimate their annual income and then estimate the amount of income tax on that income. Any amount that is not paid by withholding must then be paid in quarterly payments to the taxing authorities in the middle of April, June, September, and January (of the next year). The excess tax amount (above withholding) is known as estimated tax, and the quarterly payments are called estimated tax payments. Payments to the federal government are made on Estimated Tax Vouchers (Form 1040-ES). The IRS also has a form 1040-ES/V to help you estimate the amount of your estimated tax. Your motivation to deal with all this hassle is the substantial penalties and interest the IRS will charge you if you don't comply.  |
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