Federal income tax is a pay-as-you-go tax. You must pay the tax as you earn or receive income during the year. There are two ways to pay as you go.
Withholding
If you are an employee, your employer probably withholds income tax from your pay. If all your income will be subject to income tax withholding, you probably do not need to make estimated tax payments.
Estimated Tax
If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Self-employed individuals generally will have to pay their tax this way.
Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using EFTPS.
Who Must Make Estimated Tax Payments?
If you had a tax liability for 2003, you may have to pay estimated tax for 2004. As a general rule, if you expect to owe $1,000 or more for 2004 after subtracting income tax withholding and credits, and
- You do not expect your income tax withholding and credits to be at least 90% of the tax to be shown on your 2004 tax return.
- You do not expect your income tax withholding and credits to be at least 100% of the tax shown on your 2003 tax return (your 2003 return must have covered a 12-month period).
You MUST make estimated tax payments by the required due dates. If your answer is no to either number 1 or 2 above, then you are NOT required to pay estimated tax.
If you are a self-employed individual and do not have income tax withheld, you must also make estimated tax payments.
Example: Jane Smithers, an auto dealership salesperson, uses the following information:
| Expected Adjusted Gross Income for 2004 |
$61,125 |
| Adjusted Gross Income for 2003 |
$58,950 |
| Tax shown on 2003 return |
$11,000 |
| Tax expected to be shown on 2004 return |
$12,000 |
| Tax expected to be withheld in 2004 |
$10,900 |
Jane expects to owe at least $1,000 for 2004 after subtracting her withholding from her expected tax ($12,000 - $10,900 = $1,100), however she expects her income tax withholding ($10,900) to be at least 90% of the tax to be shown on her 2004 return ($12,000 x 90% = $10,800). Therefore, Jane does not need to pay estimated tax.
How to Figure Estimated Tax
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year. When figuring your 2004 estimated tax, it may be helpful to use your income, deductions, and credits for 2003 as a starting point. Use your 2003 federal tax return as a guide. You must also make adjustments both for changes in your own situation and for recent changes in the tax law. For information regarding changes to the tax law, reference Publication 553, Highlights of 2004 Tax Changes. The worksheet included in Form 1040-ES (PDF) and Publication 505, Tax Withholding and Estimated Tax will guide you through the process of computing estimated tax.
Additional Resources
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