Should You Pay Estimated Taxes?
If you receive income and do not have taxes withheld from it, then you may be required to pay estimated taxes. Common examples of this type of income are interest, dividends, self-employment profits, alimony, and rent. When estimated taxes are required, they should be paid upfront or quarterly (April 15, June 15, Sept. 15, and Jan. 15). Like all other tax requirements, failure to comply results in nasty penalties.
There is a general guideline to determine if you will need to pay estimated taxes. For 2011, estimated taxes are necessary if both of the following are true:
- Estimate the total amount of taxes that you will owe in 2011. From this, subtract the total amount of taxes you will have withheld from your income and apply any credits you will be eligible for. The end result is at least $1,000.
- Estimate the total amount of taxes that you will owe in 2011 and multiply it by 0.90. Now, determine the total amount of taxes that you owed in 2010. Both results are greater than the total amount of taxes you will have withheld from your income and any credits you will be eligible for in 2011.
If you need to pay estimated taxes, you can use the worksheet in Form 1040ES to determine the amount due. As always, your accountant can help you through this process and answer any questions that may arise.
