How to calculate estimated taxes

If you owed tax additional tax this year, it is possible that you should pay estimated taxes. If you are self employed it is very likely that you should pay estimated tax. This is what the IRS has to say about the topic in Publication 505.

General Rule

In most cases, you must pay estimated tax for 2010 if both of the following apply.

1. You expect to owe at least $1,000 in tax for 2010, after subtracting your withholding and refundable credits.
2. You expect your withholding and refundable credits to be less than the smaller of:

• 90% of the tax to be shown on your 2010 tax return, or
• 100% of the tax shown on your 2009 tax return. Your 2009 tax return must cover all 12 months.

You can use a worksheet to make a more accurate calculation. If all of your income is subject to withholding, you probably do not need to pay estimated tax. You will want to review your withholding with your employer.

You do not have to pay estimated tax for 2010 if you meet all three of the following conditions.

1.  You had no tax liability for 2009.
2. You were a U.S. citizen or resident alien for the whole year.
3. Your 2009 tax year covered a 12-month period.

 There are special rules for farmers, fishermen, certain higher income taxpayers, aliens, and estates and trusts.

• Farmers and Fishermen
• Higher Income Taxpayers (The percentage of 2009 AGI changes from 100% to 110%.)
• Aliens (Resident aliens should refer to Publiciation 505. Nonresident aliens should review Publication 519 for more information about Form 1040-ES (NR))
• Estates and Trusts (use Form 1041-ES, Estimated Income Tax for Estates and Trusts, to figure and pay estimated tax.)

Surprised by the size of your tax refund? Adjust your withholding.

Every year during tax filing season people complete their income tax returns and discover one of three things.

1. They owe tax,
2. They paid just the right amount during the year, or
3. They will receive a refund.

In the US tax system, employers withhold a variety of taxes, including income tax from employees' pay. Self-employed individuals, and people who have income from sources other than an employer, are supposed to make estimated tax payments throughout the year. Ideally, if the withholding is calculated correctly or if the estimated taxes are figured accurately, the amount forwarded to the government during the year will equal the amount that will be due. If the amount sent is more than the tax that will be due, then the taxpayer has made an interest free loan to the government. If the amount sent is too small, then the taxpayer may be subject to penalties.

There are many reasons that people may choose to have a larger than necessary amount withheld. For example, some people like the idea of the receiving a large refund and think of it as a forced savings plan. Another reason is that people may have an uncommon amount of deductions or credits. There may also be many reasons that withholding amounts are too small. Employees that have several jobs may find that their employers may not withhold enough. Employees may also have income from other sources. In either case, employees should either adjust their withholding or make estimated tax payments.

If your refund was too big or too small, then you should adjust your withholding or recalculate your estimated taxes. Follow the instructions that accompany the W-4. You can also use the IRS' Withholding Calculator. If you need more detailed information, it is available in Publication 919.