Estimated Tax Payments and Backup Tax Witholding


Most income you receive has taxes withheld from it. However, with some income, no taxes are withheld, even though you still must pay taxes on the income as you get it. Depending on the type of income, you can make sure to avoid penalties by using either estimated tax payments or backup tax withholding. So, if you’re wondering, “When do I have to pay estimated taxes or backup tax withholding?”, we’re here to help.

Estimated Tax Payments

Income that has no taxes withheld includes:

  • Self-employment income
  • Investment income
  • Income from rents and royalties
  • Income from partnerships and S corporations
  • Alimony you receive
  • Prizes you win

You must make estimated tax payments to the IRS for taxes you expect to owe on these kinds of income. Even if you had some taxes withheld on this income, you might still owe more in tax. You must make estimated payments if the difference between what you expect to owe and the amount withheld equals $1,000 or more.

Backup Withholding

Banks, mutual funds, and brokerages usually don’t withhold taxes on income they distribute to you or reinvest for you. However, these institutions might withhold taxes in certain situations. This type of withholding is called a backup tax withholding. If this happens, the Form 1099 you receive will report the amount withheld. There’s more than one type of 1099:

  • 1099-DIV
  • 1099-INT
  • 1099-B

Financial institutions must withhold taxes in these situations:

  • You didn’t complete Form W-9: Request for Taxpayer Identification Number. You usually need to complete this form when you open an account. This is so the financial institution has a taxpayer identification number for you, like your Social Security number (SSN).
  • You didn’t verify that your identification number is correct. You should verify this number when you complete Form W-9.
  • The IRS notifies the financial institution that the SSN on your Form 1099 is incorrect.
  • The financial institution receives a notice from the IRS requiring them to withhold taxes on the reported income. This happens:
    • When you don’t report all interest or dividends you received on a previous return
    • After the IRS has mailed you four notices over a period of 210 or more days
  • You didn’t verify that you weren’t subject to backup withholding, even though you were required to do so.

If the institution is required to withhold taxes, it will withhold taxes at a 24% rate. When you complete your return, report this amount as taxes paid so you don’t pay taxes twice on the same income.

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