How to Make Estimated Federal Income Tax Payments

If you owed taxes when you filed your federal income tax return you may need to increase the amount withheld from your paycheck. You can do that by completing a new W-4 and claiming fewer withholding allowances or by indicating an additional amount you want withheld from each paycheck. If you have income not subject to withholding, such as rental income, royalties, capital gains, or income from your own business, you may need to make estimated payments.

Rules for estimated payments

The general rule, in order to avoid an underpayment penalty when you file your tax return, is that you must make estimated tax payments if you expect to owe at least $1,000 after subtracting your withholding and credits when you file your return for this year, and you expect your withholding and credits for this year to be less than 90% of the tax you expect to report when you file your return this year, or 100% of the tax shown on your return from last year, whichever is less.

If at least two thirds of your income is from farming and fishing, the rule for making estimated payments is that you expect your withholding and credits to be less than 66 2/3% of the tax you expect to report, instead of the general rule of 90%. For higher income taxpayers (adjusted gross income of over $150,000 for 2010 or $75,000 if you are married and plan to file separately) the rule is 110% of the tax shown on your return from last year, instead of the general rule of 100%.

Calculating your estimated payments

Estimated federal income tax payments can be made four times during the year, based on your projected taxable income for the current year. If you expect that your income will be relatively evenly spread throughout the year, you can make four equal estimated payments based on your total projected taxable income for the year. This is the regular installment method.

If you expect your income to fluctuate significantly during the year, you should use the annualized income installment method. Under this method you annualize your tax at the end of each period based on an estimate of your taxable income from the beginning of the tax year through the end of the period. Each payment could be different under this method.

When to make estimated payments

The estimated tax payments are due on April 15th for the period January 1 through March 31, June 15th for the period April 1 through May 31, September 15th for the period June 1 through August 31, and January 15th of next year for the period September 1 through December 31.

It is important to note that since the federal income tax is a pay-as-you-go tax, you could be subject to an underpayment penalty if you do not pay enough estimated tax for each period, even if at the end of the year you have paid enough tax overall to cover your tax liability, and even though you may be due a refund. If you use the annualized income installment method to figure your estimated tax payments, you must file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, when you file your tax return for the current year.

How to make estimated tax payments

You can send a check or money order along with Form 1040-ES to make your estimated tax payments. Or you can pay electronically. You could use the Electronic Federal Tax Payment System (EFTPS). This is a free service provided by the U.S. Department of the Treasury. You can enroll and make your payments either online or by telephone.

You could also set up electronic funds withdrawals from your bank account to make your estimated payments when you file your tax return electronically using tax software or a tax preparer. Or you can make estimated payments by credit or debit card using a pay-by-phone system or the Internet. This payment method is through service providers that charge a percentage of the payment as a fee.

Sources:
Electronic Federal Tax Payment System - U.S. Department of the Treasury
Electronic Funds Withdrawal and Credit or Debit Card Payment Options for Individuals - IRS
Electronic Payment Options Home Page - IRS
Estimated Taxes - IRS
Form 1040-ES - Estimated Tax for Individuals
Form 2210 - Underpayment of Estimated Tax by Individuals, Estates, and Trusts
Form W-4 - Employee's Withholding Allowance Certificate
Pay Taxes by Credit or Debit Card - IRS
Publication 505 - Tax Withholding and Estimated Tax
Topic 306 - Penalty for Underpayment of Estimated Tax - IRS