Tax Tips & Calculators

Income tax is a pay­as­you­go system. If youacute;re an employee, you pay as you go through withholding.However if you´re self­employed, you must make quarterly estimated tax payments for the amount you expect to owe the IRS. These payments should satisfy both your income and self­employment taxes.

If you have other income, like W­2 wages, that also lets you withhold enough to cover self­employment taxes, you might not need to make estimated payments. However, if you receive a substantial amount of taxable income not subject to withholding, you should make estimated payments.

You might make estimated payments for income that´s not tax-free and comes from:

• Stock sales
• Personal residence sale
• Interest
• Dividends

Estimated tax payments for 2012 are due:

• April 15, 2012
• June 15, 2012
• Sept. 15, 2012
• Jan. 15, 2013

You can make estimated tax payments using any of these methods:

• Apply your 2011 refund to your 2012 estimated tax.
• Mail a check or money order with Form 1040­ES: Estimated Tax for Individuals.
• Use the Electronic Federal Tax Payment System (EFTPS) to submit payments electronically. Visit www.eftps.gov or call 1­800­555­4477 . You can make payments weekly, monthly, or quarterly. You can schedule payments up to 365 days in advance.
• Use your credit card by calling 800­555­4477 or going to your credit card provider´s web site. You´ll be changed a convenience fee for this service.

To learn more,see IRS Form 1040­ES instructions to learn more.

You must make estimated tax payments and file Form 1040­ES if both of these apply:

• Your estimated tax due is $1,000 or more.
• The total amount of your tax withholding and refundable credits will be less than the smaller of:
  • 90% of your 2012 tax liability
  • 100% of your 2011 tax liability

Special rules exist for higher income taxpayers. If your 2011 adjusted gross income (AGI) was more than $75,000 – $150,000 if married filing jointly – you must prepay 110% instead of 100% of the 2011 tax. You´ll need to do this to avoid a possible underpayment penalty for 2012.

Ex: Your 2011 tax liability was $3,800. At the beginning of 2012, you expect your 2012 tax to be $2,400, so you arrange to have a total of $2,200 withheld from your paycheck during the year. Then, in March, you sell some business assets, which gives you an additional $6,975 in income. This will increase your expected 2012 tax liability to $3,560.

You must pay 90% of the $3,560 you expect to owe for 2012, which is $3,204. Since you already arranged to have $2,200 withheld from your paycheck, you must make estimated payments totaling $1,004 ($3,204 – $2,200). Your options to avoid a penalty include:

• Make 4 estimated tax payments of $251 starting on April 15, 2012.
• Pay the entire amount of $1,004 on April 15, 2013
• Increase your withholding for the rest of 2012 so that you withhold an additional $1,004, for total withholding of $3,204.

To learn more about the estimated tax penalty, see the Underpayment of Estimated Tax tax tip.