Your Estimated Tax Payments
If you are required
to make estimated tax payments, how much do you have to pay?
Your total tax payments during the year (that is, before
January 15th of the next year) must add up to the
lower of these two amounts: (1) 90 percent of the tax you owe
for the current year, or (2) 100 percent of the tax you owed for
last year. (If your 2001 adjusted gross income was more than
$150,000, or more than $75,000 for marrieds filing separately,
substitute 112 percent in the preceding sentence.) "Tax you
owe for the year" includes federal income tax and any
self-employment (SECA) tax due on your business income.
"Total tax payments" includes any tax withholding
on any paychecks, investment income, pensions, or any other
income you receive (or your spouse receives, if filing jointly).
If the difference between any withholding during the year, and
the amount computed in the paragraph above is $1,000 or more, it
must be made up with estimated tax payments.
The best way to do this is to look at each major item on each
tax form and schedule that you filed this year, and make a guess
as to whether it will change for next year. If you think there
will be a change, estimate what the change will be (for instance
if your real estate tax bill on your office will rise by 10%,
that will reduce the amount of net income from your business on
Schedule C, and increase the amount of itemized real estate
taxes deductible on Schedule A).
Then, determine how the cumulative changes will affect your
tax bill to arrive at a ball-park estimated bill. From this
expected tax bill, subtract any withholding that will be done,
and the amount remaining, minus $1,000, is what you need to pay
in estimated taxes. Many business owners go through this
exercise at least twice a year: around April 15th,
and then again sometime in the third quarter of the year.
The IRS provides a worksheet on which you can make this
calculation, as part of the instructions to Form 1040-ES. You
can get a copy by calling 1-800-TAX-FORM.
Regular or annualized method. Once you know the total
amount of estimated tax payments you'll have to make during the
year, there are two ways to compute the dollar amount you must
pay for each quarter. The two methods generally used are the
regular installment method and annualized income installment
The regular installment method works by dividing your total
amount of estimated payments for the year by four. On each payment
due date, you pay one-fourth of the total tax due for the
year. The IRS prefers this method, and it's by far the simplest
If your business is of the type that doesn't receive income
evenly throughout the year (for example, you sell surfboards
year-round in the Northeast), you may want to use the annualized
income installment method to compute your estimated tax payments
for each period. Under this method your required estimated tax
payment for one or more periods may be less than the amount
figured using the regular installment method.
If you elect to use this method, you'll have to file Form
2210, Underpayment of Estimated Tax by Individuals, Estates
and Trusts, with your regular individual income tax return.
Using this method is more complicated than simply determining
your net income for each quarter, and figuring the tax on it.
For complete instructions on using this method, talk to your tax
advisor or get a copy of the IRS's free Publication 505, Tax
Withholding and Estimated Tax.
Corporations are generally required to make installment
payments equal to 25 percent of the required annual estimated