Estimated Tax

Federal Tax Course – Lesson 15

Introduction 1501
Who Must Pay Estimated Tax 1502
Due Dates and Computation of Payments 1503
Fiscal Year Taxpayers 1504
Joint Estimates and Payments 1505
Farmers and Fishermen 1506
Revised Estimates 1507
Penalties – How to Avoid Them 1508
Form 2210 1509


Form 1040-ES

This form is used for paying estimated tax.  The form consists of four vouchers, one of which is sent along with each quarterly payment.  Form 1040-ES also contains a worksheet to assist taxpayers in computing their estimated tax.  The check should indicate that it is for estimated tax and should show taxpayer’s full name, address and social security number.

Estimated Tax:

There are two principal methods of collecting taxes on a pay-as-you-go basis.  One method as everyone knows, is through employer withholding from employee wages.  This method, however, is only applicable to income received in the form of wages and salaries.  Taxpayers receiving income from self-employment, interest, rents or other non-wage sources are naturally not subject to tax withholding.

For this reason, the law provides for another method of collecting tax during the year the income is earned.  This is by way of requiring certain taxpayers to estimate in advance their tax liability for the current year, and to pay the amount so estimated.  This is called the estimated tax. Basically, the estimated tax is computed the same way as the actual tax is computed on the income tax return, except that estimated income and deduction figures are used.  Thus, we start with estimated adjusted gross income, subtract the deductions from AGI (either estimated itemized deductions, or the standard deduction, plus the deduction for exemptions) to arrive at the estimated taxable income and then use the appropriate tax rate schedule to compute the tax on the taxable income.  To this amount we add the estimated self-employment tax, if any, as well as any other additional taxes that might be due such as recapture taxes, the alternative minimum tax, penalty taxes, etc.  (These items are covered in a later assignment).  From this total we then deduct the amount of income tax the taxpayer expects to have withheld by his employer, any overpaid tax from last year that the taxpayer elected to have applied towards the current year’s taxes, as well as any other tax credits he may be entitled to.  The balance is the estimated tax.   The estimated tax is generally payable in four equal quarterly installments.

Following the close of the year, when each taxpayer files his regular income tax return and computes his actual tax liability, he will take credit for the amount of estimated tax paid as well as for any amounts withheld by his employer.  If the actual tax liability is larger, he will remit the difference; if it is less he will receive a refund (or he may apply the overpayment against his estimated tax for the next year).

Bear in mind that the estimated tax is not an additional tax; it merely serves as prepayment of the tax estimated to be due for the current year. 

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