Most income you receive has taxes withheld from it, but there are some types of income from which no taxes are withheld. These include self-employment income, investment income, income from rents and royalties, and income from partnerships and S corporations. In addition, alimony that you receive and prizes that you win don’t have taxes withheld, either. This doesn’t mean that the income is exempt from taxes, though. You must still pay taxes on this income, and you’re required to pay it as you earn or receive it.
If the difference between what you expect to owe and the amount of money that will be withheld is $1,000 or more, you must make estimated payments to the IRS. To learn more about making estimated payments, see Estimated Tax.
When going through the Interview, don’t forget to enter all the taxes that you’ve paid. Usually, if there is any withholding, TaxCut asks for it on the screen where you report the income from that form. For example, if you’re entering amounts from a Form W-2, TaxCut asks you to enter the earnings shown in box 1, and then asks about the amount of tax withheld, which is shown in box 2. You also need to make sure that you enter any estimated taxes that you paid during the year on your tax return.
Usually, income distributed to you (or reinvested) by banks, mutual funds, or brokerages doesn’t have taxes withheld. However, in certain situations, these institutions will withhold taxes. This type of withholding is called backup withholding. If this occurs, the Form 1099 that you receive (such as a 1099-DIV, 1099-INT, or 1099-B) will report the amount withheld.
Financial institutions are required to withhold taxes in these situations:
You didn’t complete Form W-9: Request for Taxpayer Identification Number. In most cases, you need to fill out this form when you open an account so that the financial institution has your identification number (usually your Social Security number).
You didn’t certify that the identification number you provided is correct. This needs to be done when you fill out the Form W-9 mentioned above.
The IRS notifies the bank that the Social Security number on the Form 1099 is incorrect.
The financial institution receives a notice from the IRS requiring them to withhold taxes on the reported income because you failed to report all the interest or dividends you received on a previous tax return. This only happens after the IRS has mailed you 4 notices over a 210-day (or more) period.
You failed, when required, to certify that you weren’t subject to backup withholding.
If the institution is required to withhold taxes, taxes will be withheld at a rate of 28%. When you do your taxes, make sure to report this amount as taxes paid so that you don’t pay taxes twice on the same income. In TaxCut, you enter this amount in the Federal Tax Payments section of the Interview.