Estimated Tax Definition

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Estimated Tax Definition

What Is Estimated Tax?

Estimated tax is a tax payment made quarterly for the year based on the filer’s stated income for the period. The majority of people who must pay quarterly taxes are small company owners, freelancers, and independent contractors. They do not have taxes deducted from their salaries like ordinary workers do.

Estimated taxes may be calculated for any taxable income that isn’t subject to withholding. Earned income, dividend income, rental income, interest income, and capital gains are all included.

Those with income that is not subject to automatic withholding must make quarterly estimated tax payments with the Internal Revenue Service (IRS). The taxpayer then submits the standard tax paperwork for the whole year, paying the amount owing or requesting compensation for an overpayment.

Key Takeaways

  • The quarterly filing method requires individuals and corporations to pay an estimate of their tax liability for the quarter.
  • They must also submit yearly tax returns to ascertain their precise overall tax liability.
  • Those who do not have taxes automatically deducted from their paychecks must file quarterly.

The IRS often delays filing and payment deadlines for catastrophe victims such as hurricanes, floods, and wildfires. Whether you have been impacted by a catastrophe, you may check IRS disaster relief notifications to see if you are eligible for an extension.

Understanding Estimated Tax

Everyone is expected to pay federal taxes when they earn or receive money throughout the year. In other words, income taxes are not pre-paid.

Employees have taxes deducted from their paychecks by their employers depending on the W-4 forms they complete. Others must make these payments immediately to the government in the form of an anticipated tax rather than deferring payment until the end of the year when they submit their yearly tax return.

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Self-employed individuals, independent contractors, investors who receive dividend income and generate capital gains, bondholders who receive interest income, writers who earn royalties on their work, and landlords who receive rental income are all examples of taxpayers who must estimate and pay the amount of taxes owed to the government.

Taxable unemployment compensation, retirement benefits, and any taxable component of Social Security payments received are some instances of income subject to estimated tax.

Estimated taxes are typically paid periodically. The first quarter is comprised of three calendar months (Jan. 1 to March 31).The second “quarter” lasts just two months (April 1 to May 31).The third covers the next three months (June 1 to August 31), and the fourth covers the last four months of the year.

These payments are typically due on April 15, June 15, and September 15 of the current year, as well as January 15 of the following year.

Estimated tax payments are payable in installments on April 15, June 15, September 15, and January 15 of the following year.

If the anticipated taxes paid do not match at least 90% of the taxpayer’s actual tax due (or 100% or 110% of the taxpayer’s prior-year liability, depending on the level of adjusted gross income), interest and penalties are applied.

If an individual filer’s net profits are less than $400, no tax is due. If their net profits exceed $400, they must pay an anticipated tax on the full amount. Individuals who earn less than $400 must still submit a tax return provided they fulfill certain qualifying conditions.

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Estimated Tax for Business Owners

Individuals must make anticipated tax payments on company ownership profits if the total tax on built-in gains, excess net passive income tax, and investment credit recapture tax is $1,000 or more. This includes sole proprietors, partners, and S corporation shareholders.

Corporations must pay estimated tax if their tax burden is likely to be at least $500.

Furthermore, workers who had insufficient tax withheld and consequently owing taxes to the government at the end of the previous year must make projected tax payments.

A company owner who reports income on Schedule C while also working for an employer that withholds tax may be able to raise the employer’s withholding to meet the individual’s tax burden for the whole year. The individual will not be required to pay anticipated taxes on the side company in this situation.

Form 1040-ES is used by the IRS to compute and pay estimated taxes for a particular tax year. A taxpayer who had no tax due the previous year, was a U.S. citizen or resident for the whole year, and had the preceding tax year span a 12-month period is exempt from filing Form 1040-ES.

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