Do I Need To Pay Estimated Taxes?

In order to avoid an underpayment penalty when filing your return, you must pay in at least the lower of (1) 90% of your current year's tax liability or (2) 100% of your previous year's tax liability all over again. (Note: If your AGI last year was $150,000 or more - or $75,000 if married filing separately - 112% for 2003 and beyond.) These payments may be made by having income tax withheld (in any proportion during the year), or by making four estimated tax payments with Form 1040-ES.

If you need to recompute your withholding, obtain a copy of Form W- 4 from your employer. This form contains a worksheet that allows for most circumstances, and tells you what withholding status and how many "withholding allowances" to claim. Note: that your status on Form W-4 could very well be different than your marital status, and the allowances different than the exemptions you are allowed to claim on your actual return. Form W-4 explains how this is done. Generally, if a couple is married filing jointly and both work, the number of allowances they claim in total will be less than they claim on the return itself.

If you have income that is not subject to withholding, and your tax shortfall will be more than $1,000, you need to file Form 1040-ES and make estimated tax payments during the year. These payments are due on April 15, June 15, September 15 and on January 15 of the following year (If a payment date falls on a weekend, the next Monday is the due date). The worksheet that accompanies the form explains the calculations. Generally, each payment should include the taxes you will owe for the period that ended the previous month; for example, the June 15 payment is for the two months ending May 31.