Estimated Taxes

Avoid Costly Surprises for Those with Nonwage Income

If you have nonwage income that is not subject to withholding, you’ll probably owe some tax.  If so, you are required to pay this tax to cover your tax liability through quarterly estimated tax payments or face underpayment penalties and interest.

Here are some tips on how to avoid estimated tax underpayment penalties at the end of this year and minimize the burden of quarterly taxes for 2014…

Nonwage income includes…

  • Interest and dividend income
  • Capital gains
  • Business income
  • Rental income
  • Gambling winnings
  • Taxable distributions from an IRA or pension plan
  • Social security benefits
  • Other income from non-wage sources

When you expect to owe $1,000 or more when you file your tax return, you should pay estimated taxes.

To avoid underpayment penalties, estimated tax payments must be large enough so that when combined with wage withholding they total at least…

  • 90% of the tax shown on your current individual income tax return, or
  • 100% of the tax that was shown on the prior year (110% if the prior year’s adjusted gross income exceeded $150,000 on a single or joint return, $75,000 if married filing separately).

The estimated taxes are generally paid in four quarterly estimated tax payments of equal size with due dates of April 15, June 15, September 15 and January 15 of the following year.

The penalty for underpayment is the IRS interest rate, which changes quarterly and is 3% for the second quarter of 2014.  Payments are made by filing the IRS Form 1040-ES voucher, Estimated Tax for Individuals, or electronically through the IRS’s Electronic Federal Tax Payment System (EFTPS).