Typically, people who are self-employed pay their federal income tax by making estimated tax payments. However, they aren’t the only ones that may need to pay estimated tax. Federal income tax is a pay-as-you-go tax. Which means the tax must be paid as income is earned or received during the year. The two ways federal taxes are paid are either through withholding or estimated tax.
If you receive income from sources not subject to withholding or don’t have enough withheld, you may have to make estimated tax payments. Let’s take a closer look at who may have to pay estimated tax to ensure they are meeting their tax obligations.
Who may pay estimated tax
People who are self-employed typically pay their tax through estimated tax payments. Even if you aren’t self-employed, you still may have to pay estimated tax if you receive income from sources such as:
- Interest
- Dividends
- Alimony
- Capital gains
- Royalties
- Rents
- Prizes and awards
Generally, individuals, including sole proprietors, partners, and S corporation shareholders, must make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. Estimated tax is used to pay not only income tax but other taxes such as self-employment tax and alternative minimum tax.
Ways to pay
You can pay your estimated tax online, use Form 1040-ES and pay by mail, or by phone. You can also pay through your IRS Individual Online Account, where you can also find your payment history and other tax records.
Businesses can now make most common business tax payments, including estimated taxes and federal tax deposits, through their business tax account or Direct Pay for businesses.
Avoid penalties
Most people who make estimated tax payments pay on a quarterly basis. However, they can also be made weekly, bi-weekly, monthly, etc. if you have paid enough in by the end of the quarter. If you don’t pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Knowing the requirements and paying on time is key to avoiding any penalties.