Income tax is a pay-as-you-receive proposition. If you’re an employee, this requirement is met through withholding. If you’re self-employed, however, you must make estimated tax payments to meet both your income and self-employment tax obligations.
Estimated tax is the tax you expect to owe the IRS. If you’re not self-employed, you should make estimated payments if you receive a substantial amount of taxable income not subject to withholding. Examples include gains from the sale of stock or a personal residence (if the gain isn’t considered tax-free income), and interest or dividends.
Estimated tax payments for 2008 are due April 15, 2008, June 16, 2008, September 15, 2008, and January 15, 2009. You can make them using any of these methods:
Apply your 2007 refund to your 2008 estimated tax.
By mail. You can send a check or money order, along with Form 1040-ES: Estimated Tax for Individuals, to your IRS location.
Use the Electronic Federal Tax Payment System (EFTPS) to submit payments electronically. This can be done either by the Internet or the telephone. Payments can be made weekly, monthly, or quarterly, and can be scheduled up to 365 days in advance. For more information, call 1-800-555-4477 or visit the Web site at www.eftps.gov.
Use electronic funds withdrawal. You can preauthorize one or all of your estimated tax payments when your 2008 tax return is filed electronically. Payment will occur on the dates that you select.
By credit card. You can do this by calling the 800 number or visiting the Web site of your credit card provider. A convenience fee is charged for this service. For more information, see the Form 1040-ES instructions.
You need to make estimated tax payments and file Form 1040-ES if your estimated tax due is $1,000 or more, and the total amount of tax withheld will be less than the lesser of:
90% of your 2008 tax liability, or
100% of your 2007 tax liability.
However, if your 2007 adjusted gross income (AGI) was greater than $150,000 ($75,000 if you’re married and filing separately), you must prepay 110% instead of 100% of the 2007 tax to avoid a possible underpayment penalty for 2008.
Example: Your 2007 tax liability was $3,800. At the beginning of 2008, you expect your 2008 income tax to be $2,400, so you arrange to have a total of $2,200 withheld from your paycheck during the year. Then, in March, you sell some business assets, which gives you an additional $6,975 in income and increases your 2008 tax liability to $3,560.
You must pay 90% of the $3,560 you expect to owe for 2008, which is $3,204. Since you’ve already arranged to have $2,200 withheld from your paycheck, you need to make estimated payments totaling $1,004 ($3,204 - $2,200). You have several options to choose from to avoid a penalty. You can:
Make 4 estimated tax payments of $251 starting on April 15.
Pay the entire amount of $1,004 on April 15.
Increase your withholding for the rest of the year so that the $1,004 is withheld.
Use our Tax Payment Planning Worksheet to figure your estimated taxes for 2008. For more information about the estimated tax penalty, see Underpayment of Estimated Tax.