Estimated tax

Estimated tax is a method used by taxpayers to remit taxes to the government on income that is not subject to withholding by a third party. Estimated tax is paid on a quarterly basis, preferably in four equal amounts. If the taxpayer overestimates the amount of tax, the government pays back a refund after the annual tax return is filed. In the reverse situation where the taxpayer underestimates the amount of tax, a larger-than-normal tax bill is due after the annual tax return is filed. A taxpayer may be subject to penalties if estimated taxes are not paid by the scheduled due dates. The following entities may be required to remit estimated tax payments:

  • Corporations
  • Partners
  • People who owed taxes for the prior year
  • S corporation shareholders
  • Self-employed persons
  • Sole proprietors

The following are all types of income on which estimated tax payments must be made:

  • Business earnings
  • Dividend income
  • Interest income
  • Self-employment income

Estimated tax payments are required when a taxpayer expects to have an annual tax liability of at least $1,000.