Who Must Make Estimated Tax Payments?

You're probably asking yourself: "Do I have to make estimated tax payments for 2013?" By answering "yes" or "no" to these three questions, you'll have your answer.

1. Do you expect to owe $1,000 or more for 2014, 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.
2. Do you expect your income tax withholding and credits to be at least 90 percent of the tax you'll owe for 2014? If the answer is yes, you are not required to pay estimated tax. If the answer is no, go on to the next question.
3. Do you expect your income tax withholding and credits to be at least 100 percent of the tax shown on your 2013 return? (If your 2013 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 2013, or (b) 100 percent of the amount you owed last year (110 percent for high-income taxpayers).

Save Money Beginning in 2013, a new 0.9 percent Medicare surtax applies to self-employment income exceeding a threshold amount. The threshold amount is based on filing status ($250,000 for joint return, $125,000 for separate, and $200,000 in any other case) and is coordinated with FICA wages. (The corresponding FICA surcharge is borne entirely by the employee; there is no employer match. Presumably, this is why there is no employer-equivalent deduction for self-employment tax purposes.) If your income is high enough to be subject to this surtax, consider increasing the amount of your estimated tax payments, in order to avoid a penalty come tax time. Your accountant or advisor should be able to help you decide how much to pay. Another consideration is that beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.

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).