This year, you're being paid the same salary, but you have earned an extra $10,000 doing odd jobs, with no taxes withheld. So you're earning $50,000 and you will owe $6,250 in federal taxes. But you're having only $3,800 withheld. That amount is less than 90 percent of your bill, so you should plan on making quarterly payments to cover the extra $2,450 that you'll owe.
Another route to take, since you're drawing a regular paycheck as well as earning outside income, is to file a new W-4 form with your employer to increase the amount of tax withheld. The IRS's Publication 919 or its online withholding calculator can help you figure the new amount to withhold.
Even if you fall short of the 90 percent threshold, there are a couple of exceptions that can let you avoid paying estimated taxes:
1. Your final tax due for the current year will be less than $1,000.
2. This year's withholding and credits will add up to as much as last year's taxes. This exception benefits people who have a one-year jump in income, perhaps from selling long-held assets for a large gain.
There are several ways to estimate what your taxes for the current year will be. IRS Form 1040-ES, Estimated Tax for Individuals, includes a worksheet to calculate them. (This form is not for the faint of heart!)
Software can help
If you use commercial tax preparation software such as Intuit's TurboTax or H&R Block At Home, the program will warn you whether estimated tax payments are likely needed for the next tax year. And free online calculators are available from KJE Computer Solutions and, starting in December, from TurboTax.
If you do owe estimated payments, making them is easy — at least as far as the paperwork is concerned. You just divide the tax owed on the income into four equal parts and send payments to the IRS along with a two-line form, with the money arriving by the due dates for estimated payments — in April, June and September of the current year and January of the following year.
If you don't receive the untaxed income until one or more of these dates has passed, divide the extra tax owed by the number of filing dates remaining.
Penalty for failing to file
If you fail to make required payments, the IRS will charge you interest (currently 3 percent) on the unpaid amounts. Taxes that remain unpaid after the filing date could be subject to penalties. You can calculate this penalty using IRS Form 2210, or the IRS will calculate it for you and send you a bill.
Also of interest: How to get help with tax returns. >>
Art Dalglish is a writer and editor based in Maryland.
Published December 2011