Estimated Tax Basics

• The federal income tax is a pay-as-you-go tax, meaning you must pay taxes on income you earn at the time that you earn it. Estimated taxes provide a way for taxpayers to pay taxes to the IRS on income that is not subject to tax withholder by an employer. The IRS states that you may have to pay estimated taxes if you have income from sources like self-employment, interest on savings, dividends, alimony, rent, capital gains or if you win prizes. If you are a business owner or an independent contractor you are considered self-employed and you must pay estimated taxes if you expect to owe at least $1,000 when you file your tax return.
  
  

When to Pay Estimated Taxes

• Estimated taxes must be paid on a quarterly basis. The IRS says that the estimated tax due dates for a given tax year are April 15, June 15, September 15 and January 15 of the following year. If a due date falls on holiday or weekend, it may be pushed back to the next business day. The April payment date for 2011 was due on April 18, 2011 and the 4th payment for 2011 is due on January 17, 2012.
  
  

Calculating Estimated Taxes

• Estimated taxes are based on your income, tax deductions and credits. The IRS says that taxpayers may use Form 1040-ES to calculate estimated taxes. The form contains instructions and worksheets that guide taxpayers through the process of calculating quarterly payments.
  
  

Penalties for Underpayment of Estimated Tax

• If you were required to make estimated tax payments, but failed to do so or did not pay enough in estimated taxes, you may owe a tax penalty. The instructions of Form 1040-ES state the penalties may be imposed on each underpayment for the number of days it remains unpaid and that penalties can be imposed if you do not make payments on time. The IRS says that taxpayers can use Form 2210 to determine whether they owe a penalty.