As an employee, the taxpayer has Federal (and State, if applicable) taxes withheld from their paycheck using IRS created tax tables. However, if one has significant income other than wages – such as freelancing, pension income, investment income, capital gains, etc. – withholding may not be sufficient.
For freelancers/self-employed workers, no one is there to collect and remit the tax to the government, therefore the responsibility falls to them personally. Rather than pay withholding, these taxpayers must pay quarterly estimated tax payments using Form 1040-ES.
If tax is underpaid, the taxpayer may be subject to an estimated tax penalty (line 76 of Form 1040). How does one avoid this?
Total withholding and estimated payments must equal at least:
1) 90% of the tax shown on the 2009 return (see this post on estimated tax liability)
2) 100% of the tax shown on your 2008 return, or 110% of your 2008 AGI was over $150,000 ($75,000 for married, filing separate)
There are also several other exceptions, most notably:
- tax due after subtracting withholding is less than $1,000
- the taxpayer was a US citizen or resident and had no tax liability the prior year
- also see Form 2210 for other situations
Why discuss this now?
- The final estimated tax payment for 2009 is due January 15, 2010.
- A new tax year has begun and it is never too early to start planning ahead.
Please leave a comment or send me an email with any questions or issues you have experienced dealing with this, or any subject.
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