How to Make Estimated Tax Payments

Make estimated tax payments when you have income that is not subject to tax withholding. You can avoid penalties you would otherwise incur for underpaying your taxes.

Things You'll Need

• Calculators
• File Cabinets
• Postage Stamps
• Calendars
• File Folders
• Paper And Pencils
• Personal Financial Software
• Tax Preparation Software

Instructions

Estimating - Method 1

1. Determine your expected adjusted gross income. Do this by taking last year's income and adjust according to anticipated changes.

2. Subtract your expected deductions and exemptions to obtain your expected taxable income. Again, use last year's figures as a base.

3. Calculate the expected tax according to the tax table or tax schedules.

4. Subtract your expected credits.

5. Add any expected additional taxes. Self-employment Social Security taxes are the most common additional taxes.

6. Subtract your expected tax withholdings. What is left should be paid in estimated tax payments.

Estimating - Method 2

1. Multiply the total tax shown on your last year's tax return by 90 percent. For the tax year 2001, the last year is 2000.

2. Verify the total tax shown on your year-before-last tax return. For the tax year 2001, the year before last is 1999.

3. Determine the smaller of 100 percent of your tax for the tax year before last or 90 percent of your tax for last year.

4. Subtract your expected tax withholdings. What is left should be paid in estimated tax payments.

Sending In Estimated Tax Payments

1. Obtain Form 1040-ES. Go to the local Internal Revenue Service office to get it, or order it by mail, phone or the Internet. It will come with four payment vouchers.

2. Divide your total amount of estimated tax payments by 4. You will be making four equal payments.

3. Send in the first payment with a 1040-ES voucher before April 16, 2001.

4. Send in the second payment with a 1040-ES voucher before June 15, 2001.

5. Send in the third payment with a 1040-ES voucher before September 15, 2001.

6. Send in the last payment with a 1040-ES voucher before January 15, 2002.

Tips & Warnings

• Estimating your tax withholdings can be tricky if you are employed at a new job or if the amount of your earnings will change substantially. Go to the person in charge of payroll and ask what your withholdings will likely be.

• If you are self-employed, you are required to pay a Social Security tax of 12.4 percent on all of your net income up to $76,200 for 2000 and a Medicare tax of 2.9 percent on all of your net income with no limit.

• If two-thirds or more of your income comes from farming or fishing, you will not be penalized if the total of withholdings and estimated tax payments equals at least 66 2/3 percent of the previous year's tax.

• Always put your Social Security number on the 1040-ES vouchers. Your Social Security number should be on everything you send to the IRS.

• Make checks payable to the United States Treasury.

• You will not incur an underpayment penalty if your tax due is less than $1,000.

• If you had no tax liability at all for 2000, you do not have to make estimated tax payments for 2001.

• The IRS will sometimes waive an underpayment penalty if you have a compelling explanation. A change in filing status, especially from married filing jointly to married filing separately, will often result in a penalty waiver, but you have to request the waiver.

• If your adjusted gross income was over $150,000 in tax year 2000 - or $75,000 if married filing separately - you must pay either 90 percent of your 2001 tax or 110 percent of your 2000 tax liability toward your 2001 taxes in withholdings and estimated tax payments to avoid penalties.

• If you use the first method for calculating estimated tax payments and if you earn more money during the year from nonwithholding income than you anticipated, you could end up with tax due and an underpayment penalty. First-method users who recognize this is happening midway through the tax year should boost their estimated tax payments on payments still to be made.