What does Estimated Tax mean?
Estimated tax refers to the payment of tax on income when the income is not subject to withholding. Typically, this income includes interest, dividends, rent, alimony, gains from the sale of an asset, and self-employment income. Estimated tax payments can also arise from wages if the employer does not withhold enough tax. However, for most individuals, estimated tax payments are only necessary when they are self-employed.
For taxpayers who expect to have a tax liability of $1,000 or more when they file their income tax returns and whose withholding is less than 90 percent of the tax owed, they should make estimated tax payments to the Internal Revenue Service. If a taxpayer does not make estimated tax payments when withholding falls below 90 percent of the tax liability owed, the Internal Revenue Service will assess the taxpayer a penalty for underpayment of taxes.
Estimated tax payments should be made quarterly on April 15, June 15, September 15, and January 15.