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Who Should Make Estimated Tax Payments

January 30, 2015

Those whose income is not subject to withholding need to make estimated tax payments. Income from self-employment, dividends, rent, interest, alimony, prizes and awards, and gains from the sale of assets are subject to estimated tax payments. Those whose income is being withheld are only required to pay estimated tax if their tax liability is more than the amount withheld from their wages.

Estimated Tax Payment Limit

Self-employed individuals need to pay estimated tax only if their income exceeds a certain amount. For sole proprietors, partners, the self-employed, and S corporation shareholders, the amount in taxes that they owe at the time of the filing a return must be $1,000 or more for them to pay estimated tax.

For corporations, the minimum amount in taxes that will require them to make estimated tax payments is $500.

Estimated tax is charged to pay the income tax, the self-employment tax, and other applicable taxes. Those workers who get a part of their income withheld, pay their taxes using the withheld amount. The self-employed, on the other hand, are not subject to withholdings and need to calculate and pay estimated tax and other applicable taxes on their own.

Non-Payment of Estimate Tax

Non-payment of estimated tax leads to tax debt. If the estimated tax is not paid before the payment due date, the IRS charges a penalty. Also, if you do not pay your full tax liability by the due date, then you face a penalty for failure to pay your entire tax liability.

To avoid having a tax debt, it is critical to correctly calculate your tax liability for each payment period and to file your return on time. If you have underpaid your taxes, you must quickly resolve your tax debt to avoid the accumulation of penalties and interest.

When calculating your tax liability, it is better to pay more in taxes than to pay less. The advantage of paying more is that you will get the balance back in a refund; if you pay less, you will be paying more in taxes due to penalties and interest.

How to Pay

The self-employed, sole proprietors, partners, and S corporation shareholders need to file Form 1040-ES, Estimated Tax for Individuals. Corporations may use Form 1120-W, Estimated Tax for Corporations.

To correctly calculate your quarterly estimated tax payments, you need to consider your AGI, taxable income, credits and deductions, and other taxes that apply to your work.