Estimated tax payments are payments you have to make to the IRS if money isn’t taken out from a paycheck. It’s essentially the way you make your own withholding payments instead of having an employer do it. If you get a paycheck from your employer, money will be automatically taken out for social security and medicare (FICA). If you are self-employed, you have to perform the withholding yourself by making estimated tax payments to the IRS.
Social Security taxes aren’t the only type of taxes payed through estimated tax payments. Income taxes are also covered in these payments if you are self-employed.
Taxpayers who are self-employed aren’t the only people who need to make estimated tax payments. If you receive alimony, rent, or capital gains or if you have income from interest or dividends you will have to make estimated tax payments. Other forms of income that may require you to make estimated tax payments are:
- sale of assets
- prizes (for example, you win the lottery)
If you are getting a paycheck or pension and the withholding amount isn’t enough then you may also have to make estimated tax payments even though you are not self-employed.
Make sure you know the requirements of the IRS’s estimated tax payments system. If you don’t pay on time each quarter you will be charged penalties by the IRS. That applies even you don’t end up owing them money when you do your taxes at the end of the year.