You're probably asking yourself: "Do I have to make estimated tax payments for 2012?" By answering "yes" or "no" to these three questions, you'll have your answer.
- Do you expect to owe $1,000 or more for 2012, after subtracting any income tax withholding and credits from your total tax? If the answer is no, you are not required to pay estimated tax. If the answer is yes, go on to the next question.
- Do you expect your income tax withholding and credits to be at least 90 percent of the tax you'll owe for 2012? If the answer is yes, you are not required to pay estimated tax. If the answer is no, go on to the next question.
- Do you expect your income tax withholding and credits to be at least 100 percent of the tax shown on your 2011 return? (If your 2011 adjusted gross income was more than $150,000, or more than $75,000 for marrieds filing separately, substitute 110 percent in the preceding sentence). If the answer is yes, you are not required to pay estimated tax. If the answer is no, you must make estimated tax payments.
The IRS treats tax payments that are made through payroll withholding as being made evenly through the year, regardless of when the withholding is actually done. If you or your spouse is receiving a paycheck, you can avoid the need to make estimated tax payments and retain the use of more money throughout the year, if you arrange to have extra tax withheld from your paycheck during the last month of the year.
You can do this by filing a revised Form W-4 with your employer (or your spouse's employer) during the last month of the year. To avoid penalties, the extra withholding must be a dollar amount that brings your total tax withholding for the year up to the lesser of (a) 90 percent of the amount you expect to owe in 2012, or (b) 100 percent of the amount you owed last year (110 percent for high-income taxpayers).
Estimated tax for corporations. If your business is operated as a corporation, the corporation must make estimated tax payments if it expects its tax to be $500 or more for a tax year. In addition, a corporation will generally be subject to an underpayment of tax penalty if the estimated tax payments, required in installments, do not equal the lesser of (1) 100 percent of the tax shown on the return for the preceding year, or (2) 100 percent of the tax shown for the current year (the current year tax may be determined on the basis of actual income or annualized income).