Our Instructions vs IRS Instructions

Our goal was to create a Tax Preparer Study Guide that either an experienced or rank amateur tax preparer can use to help prepare for the IRS exam. We wanted to make sure it was abbreviated enough to save the individual time, without sacrificing content. Lastly we wanted our study guide to be somewhat entertaining and interesting to read. Granted, tax instructions by nature is a dry and dull subject. However, we don’t believe that a person has to fall asleep while studying it. We have done our best to make the material a bit more interesting by interjecting humor here and there. Please compare the excerpt below with the IRS instructions covering the same subject here.


For the most part, federal tax is a “pay-as-you-go” system.  To avoid having to pay the man penalties and interest charges, a taxpayer must pay what they owe to the government throughout the year as they make money.  This can be done through withholding on your income from an employer or on income from sources such as pensions, unemployment, and gambling winnings.  For income that is not subject to withholding, a taxpayer must estimate his tax liability and send in quarterly payments to the IRS.  This kind of income arises from things like interest, dividends, capital gains, rent, self-employment, and royalties.  The due dates for estimated tax payments are listed below:

Estimated Tax Payment Schedule

Who does not have to bother with paying estimated taxes?

  1. A taxpayer who withholds enough taxes from their wages, salaries, & income to cover what they owe
  2. A taxpayer that had no tax liability in the previous year (total tax was 0 or they didn’t have to file an income tax return) and is a U.S. citizen or resident alien for the whole year

Estimated tax liability exists for the current tax year when:

  1. A taxpayer will owe at least $1,000 in tax, after subtracting withholding and credits, and
  2. Withholding and credits will be less the smaller of:
  • 90% of the tax shown on this year’s return or
  • 100% of the tax shown on last year’s return (110% if AGI is over $150,000)

EXAMPLE: Candy had total tax last year amounting to $20,000.  After much deliberate brown-nosing, she was finally promoted to VP this year and got a nice, fat raise, which bumped her tax up by $4,500.  Candy had $22,700 withheld this year from her pay.  To avoid a penalty for underpayment of estimated tax, she must do what?  If you answered that she doesn’t have to do anything you get a gold star!  Let’s start at the top and work our way down.  We know that Candy is a candidate for having to pay estimated taxes this year because she had tax liability ($20,000) last year and owes at least $1,000 this year.  Actually, she owes $1,800 in taxes this year, which is found by subtracting her total tax ($20,000 + $4,500 = $24,500) by the amount she had withheld from her checks ($22,700).  Now we have to see if her withholding and credits, is less than the smaller of 90% of the tax shown on this year’s return or 100% of the tax shown on last year’s return.  Well, 90% of $24,500 = $22,050 & 100% of $20,000 = $20,000.  $20,000 is smaller than $22,050 so that is what we will use in our final determination.  $20,000 is not less than her withholding of $22,700 so she gets a pass from having to pay estimated taxes this year.  This kind of a question is a staple on just about any kind of IRS test given.

Use form 1040 ES to figure estimated tax. A worksheet provided in the form is used to calculate payments.

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