Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.
Estimated tax is also used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.
Who Must Pay Estimated Tax
If you had a tax liability for 2013, you may have to pay estimated tax for 2014.
You must pay estimated tax for 2014 if both of the following apply.
- You expect to owe at least $1000 in tax for 2014 after subtracting your withholding and credits.
- You expect your withholding and credits to be less than the smaller of;
- 90% of the tax to be shown of your 2014 tax return, or
- 100% of the taxes shown on your 2013 tax return. Your 2013 tax return must cover all 12 months.
Sole proprietors, partners, and S corporation shareholders generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.
Corporations generally have to make estimated tax payments if you expect the corporation to owe tax of $500 or more when you file its return.