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How to Calculate and Pay Estimated Taxes

written by: Patricia Tokar, CPA•edited by: Laurie Patsalides•updated: 6/14/2011

Do I need to make estimated tax payments? How do I pay estimated taxes? Can I just pay when I file my tax return? If you have income from sources other than a paycheck, you may need to make Federal estimated tax payments.

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    Calculate Your Projected Taxes

    The first step is to decide how much, if any, estimated tax you need to pay.

    Estimated taxes depend on your total taxable income and overall taxes. An easy estimating method is to use your last tax return as a base point. For 2011 estimated taxes, look at each line item on the 2010 return. Note if the 2011 amount will be higher, lower, or about the same as 2010. Update the number of dependents claimed, if needed. Determine if you will still be able to claim any credits claimed on the 2010 return, or if you can claim new 2011 credits. Note any new type of income that you are expecting, such as self-employment income, rental income, or a withdrawal from an IRA or pension plan.

    Now get a blank tax return (or, even better, use a tax software program) and fill it in with these updated numbers. Calculate this projected tax return, using 2011 rates and deductions, if available. Otherwise, use 2010 rates and deductions - you should still have a good rough projection of 2011 taxes. If you have self-employment income, don't forget the self-employment tax.

    The Form 1040-ES also has a worksheet you can use to figure the amount if you prefer.

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    Figure Any Withholding

    The amount of any expected tax withholding from paychecks, withholding from pensions, and other payments should be subtracted from the estimated total taxes. Take a look at pay stubs and payment information to determine how much you expect to have withheld in 2011.

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    The Balance Is Amount of Taxes You Will Owe

    Now subtract projected tax withholding from the calculated tax. This is the amount of tax that you expect to owe when you file your 2011 tax return and is the amount subject to making quarterly estimated tax payments. If the withholding is larger than the tax, then you will expect a refund and should not need to make estimated payments.

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    Are You Required to Pay Estimated Taxes?

    Even with an expected balance due, you may not be required to make estimated tax payments. You can choose to just pay the balance owed when you file if you meet any one of the following guidelines:

    • the balance due will be less than $1000.00
    • you have payroll withholding and tax credits equal to 100% of the total tax showing on your 2010 tax return (line 60 of the 2010 Form 1040)*
    • you have payroll withholding and tax credits equal to 90% of the total tax that will show on your 2011 tax return*

    *If your 2010 Adjusted Gross Income is higher than $75,000 ($150,000 for joint returns), then you must use 110% for the prior year test or use 100% for the 2011 test (some exceptions apply for farmers and fishermen)

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    Determine Your Estimated Payments

    For the regular method of making estimated payments, take the projected tax balance owed (that you calculated above) and divide it by four. Use this for the amount of your quarterly estimated payments. This can be updated in later quarters if you have a change in income.

    You can also use a special method, called the annualized method, if your income will occur unevenly throughout the year. For example, you have a seasonal small business which has income in only a few months of the year. In this case, you can make estimated payments based on the income of each quarter.

    The minimum 2011 quarterly payments must equal at least 100% of the 2010 taxes, after subtracting withholding and tax credits, on your 2010 return. (You may instead use 90% of the total 2011 expected tax if that will be smaller.) Refer to the section above, Are You Required to Make Estimated Payments, for more details.

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    Get Form 1040-ES

    You can call the IRS at 1-800-829-1040 to request Forms 1040 ES for making estimated payments. You can also download forms from the IRS website, www.irs.gov.

    Form 1040-ES: http://www.irs.gov/pub/irs-pdf/f1040es.pdf

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    Make Your Estimated Payments

    Your payments will be due April 15th, June 15th, September 15th, and the following January 15th. If the 15th falls on a weekend or holiday, then the payment is due on the next business day. Take note of these dates - they do not fall in even quarters as you would expect.

    To pay by check: Write your check payable to "United States Treasury." Note your social security number (or at least the last four digits) and "Form 1040 ES Year 2011" on the check. Mail the payment and Form 1040-ES to the address shown on the form.

    To pay electronically or by credit card, see details on the Form 1040 ES.

    Be sure to keep a record of your payments, including the date, check number, and amount.

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    But I Can't Make My Estimated Tax Payments!

    What happens if the quarterly due date arrives and you don't have the funds to make the payment? If at all possible, use the "100% of a prior year" or "90% of current year" rule to make the minimum acceptable payment. Otherwise, pay as much as you are able.

    There are multiple penalties that apply to estimated payments, including 'failure to make estimated payments', 'late payment of estimated taxes', and 'underpayment of estimated taxes'. Additionally, interest will be charged on the underpayments. For this reason, if you have made an underpayment, then you should send in the rest of the payment as soon as you are able. At the least, you should pay extra on the next regular quarterly tax payment.

    Another method of easing the estimated tax burden is to increase the withholding on your paychecks. If you are able to increase the withholding enough to meet the 100% or 90% rules then you will not even need to make estimated tax payments.

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    What About State Estimated Taxes?

    Each state has its own rules and requirements for making estimated payments. Most will roughly follow the Federal rules.

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    A Word to the Wise and to the Financially Disorganized

    Paying estimated taxes is a discipline that must be learned if you will regularly have income that does not have withholding. If your estimated payments are a result of being self-employed, it is essential for the financial health and strength of your business that you learn the habit of calculating and paying estimated taxes.

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    IRS Instructions for 2011 Estimated Taxes - Publication 505

    IRS Publication 505 has worksheets and helpful information on making 2011 Estimated tax payments.

    http://www.irs.gov/pub/irs-pdf/p505.pdf

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    Legal Section

    This article is not intended to be specific tax advice. It is intended as a general guideline only. Any specific advice should be sought from your tax professional.

    CIRCULAR 230 DISCLOSURE: Pursuant to Treasury Department guidelines, any federal tax information contained in this article, or any attachment, does not constitute a formal tax opinion. Accordingly, any federal tax advice contained in this communication, or any attachment, is not intended or written to be used, and cannot be used, by you or any other recipient for the purpose of avoiding penalties