What are Estimated Tax Payments?

Estimated tax payments are payments to a government tax board on untaxed but taxable income. This includes money made from things like investments, collected rent, lotto winnings, independent contractor work, or earnings from a sole proprietorship. If earnings exceed more than a couple thousand dollars a year and the earner paid taxes the previous year, then he or she may need to make estimated tax payments on a quarterly basis to agencies like the Internal Revenue Service (IRS), to avoid fines and also to avoid huge tax bills at the end of the year.

In order to figure out estimated tax payments, individual filers in the U.S. use a form called the 1040-ES. Corporations use a similar form that is called the 1120-W. The 1040-ES is similar to a regular 1040, and taxpayers will estimate their tax by looking at their available deductions and their tax bracket. Many people use this form once to create a ballpark figure for their liability, and in subsequent years, if their income doesn’t change dramatically, they use the figures from the previous year, possibly adding on a little more in each payment to account for slight increases in income.

It also isn’t always necessary to make estimated tax payments. If in the past year, a person’s income was not subject to taxes after all deductions were made, they may not need to pay quarterly taxes. In order to qualify for this in the U.S., taxpayers must also have been citizens the whole year and had a tax period that lasted 12 months. On the other hand, some people or corporations may prefer to report quarterly taxes based on the forms because they may more accurately reflect true tax amounts for the year and end in lower likelihood that yearly taxes will need to be paid, too.

The term "quarterly" must be defined because there are fines and fees associated with failing to make estimated tax payments for qualified earners. The IRS does not break up the quarters evenly. Due dates for taxes fall in April, June, September and January. There are only two months between the April and June payments. Also, taxpayers might make two payments in April because they still have to file a yearly tax return. If they estimated too low, they may owe taxes for the previous year, in addition to tax payments for the first part of the current year.

Estimating money owed has the advantage of avoiding large payments at the end of the year. Taxpayers should always keep current on the rules of tax-collecting agencies to determine whether they need to estimate taxes and pay quarterly. Filing this form four times a year in addition to a yearly form creates a paperwork burden, and many people ask accountants or financial consultants to fill out these forms instead.