Estimated Tax Payments Key Terms

Navigate estimated tax forms by knowing some important concepts

By Laurie Edwards

Estimated tax payments are taxes paid quarterly by businesses or self-employed individuals. These taxes are based either on expected income or on the previous year's income. To avoid penalties, individuals or businesses must pay the equivalent of at least 90% of the previous year's tax. When figuring quarterly payments, you are allowed to take any of the deductions to taxable income that you would normally take on the 1040. Estimated tax payments are required by the federal government as well as by many states.

Self-Employment Contributions Act (SECA) tax

The Self-Employment Contributions Act tax is imposed on those who are self-employed. It is a 15.3% tax that is equivalent to the FICA tax paid by corporations. Employees generally pay half of that amount, and employers cover the rest, but the self-employed individual is expected to pay both portions.
Try: Business Owner's Toolkit explains the self-employment tax and has links that detail the rules for special situations.

Electronic Federal Tax Payment System (EFTPS)

The EFTPS, or Electronic Federal Tax Payment System, is a free program set up for paying federal taxes online or by phone. The system is rapid and secure, and it allows users to pay their estimated taxes quickly, even at the last minute.
Try: Additional information on EFTPS is available on the Internal Revenue Service website.

Unrelated Business Income Tax

The government imposes an Unrelated Business Income Tax on organizations, such as charities, that receive income from donations or other non-business ventures. This tax must also be paid quarterly in estimated tax payments if it exceeds $500.
Try: Harvard College and the Urban Institute define unrelated business income.

Annualized income installment method

The annualized income installment method is usually the easiest way to figure your estimated tax payments when your income varies during the year. To use this method for calculating your tax, begin with the income you will earn if your earnings continue at the rate they did the previous year.
Try: The State of Connecticut explains how to calculate your taxes using the annualized income installment method.

Penalties

Penalties can be incurred for underpayment of tax or for missed or late payments. To be sure you do not owe penalties, submit your quarterly taxes by the due dates. The four installments are due on April 15, June 15, September 15, and January 15. The government doesn't impose penalties on taxpayers whose income increases significantly during the year provided the amount of estimated tax they paid was at least 90% of the tax they owed the previous year.
Try: Bankrate provides information on avoiding penalties on your estimated taxes.

Form 1040-ES

Form 1040-ES is the form you use to pay your estimated taxes. Before you send your first payment of the new tax year on April 15, follow the instructions for calculating your estimated payment. Then you can pay online, by phone, or by mailing in your payment accompanied by a voucher.
Try: The Web Tax Center explains Form 1040-ES and offers tips for filling it out.