In the tax world, there are two types of income: wages and non wages. Wage earners are people who work for someone, they get a salary, they are called employees. Everyone else who has income but not salary falls into the category of those who need to pay estimated taxes.
So if you’re not a wage earner and you receive income, your source of income may be one of the following:
- stocks sales
- interest income
- self-employment income
- income from a business
All of the above listed types of income are not subject to withholding. On the other hand, wage earners’ paychecks have withholding…money is taken out for Uncle Sam. But you have to pay up at some point, and this is where estimated tax payments come in.
Usually estimated tax payments are made quarterly…four times a year. The objective is not to owe penalties to the IRS when you do your income taxes for the year. In order to avoid penalties for underpayment of your taxes, use the previous year’s income tax as a guideline. Unless you expect an enormous jump in your earnings, pay what you paid last year.
There is an option to pay just 90 percent of last year’s taxes, and that’s for people who expect to make less. But you better be sure because if you don’t pay enough you’ll end up paying an underpayment penalty.