Tax Preparer Study Guide Instructions vs IRS Instructions

Our Easy Condensed Guide
WITHHOLDING & ESTIMATED TAX

Tax Preparer Study GuideFor 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.  Withheld taxes usually reduce the likelihood of having to pay estimated taxes or the amount of estimated tax due.  The IRS does have a handy-dandy “Withholding Calculator” on their website that can be helpful for determining just how much a taxpayer should have withheld from their income.  Employees must provide their employer with FORM W-4, Employee’s Withholding Allowance Certificate.  This form tells the employer how much of the employee’s income to withhold and pay the Federal Government.  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.  For those that need to send in estimated payments throughout the year, they can use Form 1040-ES.

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

PAYMENT AMOUNTS

Generally, the minimum payment due during the first pay period the taxpayer receives taxable income is:

  • One quarter of the total estimated tax for the year, plus
  • An additional one quarter of the yearly total for each period that has already passed.  The taxpayer must then pay the balance of the estimated tax during the remaining periods (one quarter of the yearly total for each remaining period).

A taxpayer can pay in installments other than even amounts.  However, if a quarterly installment is less than one quarter of the total estimated tax, the taxpayer risks an underestimated
tax penalty.

Taxpayers also have the option of paying all the estimated tax at once.  Instead of paying by installments, taxpayers may choose to pay the entire amount by the due date of the period during       which the income is received.  For example, some taxpayers choose to pay all of their estimated tax with the first payment due April 15th so they don’t have to be worry about it for the rest of the    year.

Taxpayers who file their Form 1040 or Form 1040A by January 31st and pay the entire amount of tax owed at that time are not required to make the estimated tax payment due January 15th.

The due dates for estimated tax payments are listed below:

Period Due Date
Jan 1 – March 31 (3 months) Apr 15 (4th month)
Apr 1 – May 31 (2 months) Jun 15 (6th month)
Jun 1 – Aug. 31 (3 months) Sep 15 (9th month)
Sep 1 – Dec. 31 (4 months) Jan 15 (1st month following calendar tax year)

Who DOES NOT have to pay 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 less than her withholding of $22,700 so she gets a pass from having to pay estimated taxes this year.

Note: This kind of a question is a staple on just about any kind of IRS test given.

What’s on the IRS Competency Exam?

Why US over the competition?

An Excerpt from IRS Publication 17
WITHHOLDING & ESTIMATED TAX

This chapter discusses how to pay your tax as you earn or receive income during the year. In general, the federal income tax
is a pay-as-you-go tax. There are two ways to pay as you go.

  • Withholding. If you are an employee, your employer probably withholds income tax from your pay. Tax also may be withheld from certain
    other income, such as pensions, bonuses, commissions, and gambling winnings. The amount withheld is paid to the IRS in your
    name.
  • Estimated tax. If you do not pay your tax through withholding, or do not pay enough tax that way, you may have to pay estimated tax. People
    who are in business for themselves generally will have to pay their tax this way. Also, you may have to pay estimated tax
    if you receive income such as dividends, interest, capital gains, rent, and royalties. Estimated tax is used to pay not only
    income tax, but self-employment tax and alternative minimum tax as well.

This chapter explains these methods. In addition, it also explains the following.

  • Credit for withholding and estimated tax. When you file your 2009 income tax return, take credit for all the income tax withheld from your salary, wages, pensions,
    etc., and for the estimated tax you paid for 2009. Also take credit for any excess social security or railroad retirement
    tax withheld (discussed in chapter 37).
  • Underpayment penalty. If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have
    to pay a penalty. In most cases, the IRS can figure this penalty for you. See
    Underpayment Penalty for 2009
    at the end of this chapter.

Useful Items – You may want to see:

Publication

  • 505
    Tax Withholding and Estimated Tax
  • 919
    How Do I Adjust My Tax Withholding?

Form (and Instructions)

  • W-4
    Employee’s Withholding Allowance Certificate
  • W-4P
    Withholding Certificate for Pension or Annuity Payments
  • W-4S
    Request for Federal Income Tax Withholding From Sick Pay
  • W-4V
    Voluntary Withholding Request
  • 1040-ES
    Estimated Tax for Individuals
  • 2210
    Underpayment of Estimated Tax by Individuals, Estates, and Trusts

Tax Withholding for 2010

This section discusses income tax withholding on:

  • Salaries and wages,
  • Tips,
  • Taxable fringe benefits,
  • Sick pay,
  • Pensions and annuities,
  • Gambling winnings,
  • Unemployment compensation, and
  • Certain federal payments, such as social security.

This section explains the rules for withholding tax from each of these types of income.

This section also covers backup withholding on interest, dividends, and other payments.

Salaries and Wages

Income tax is withheld from the pay of most employees. Your pay includes your regular pay, bonuses, commissions, and vacation
allowances. It also includes reimbursements and other expense allowances paid under a nonaccountable plan. See
Supplemental Wages
, later, for more information about reimbursements and allowances paid under a nonaccountable plan.

If your income is low enough that you will not have to pay income tax for the year, you may be exempt from withholding. This
is explained under
Exemption From Withholding
, later.

You can ask your employer to withhold income tax from noncash wages and other wages not subject to withholding. If your employer
does not agree to withhold tax, or if not enough is withheld, you may have to pay estimated tax, as discussed later under
Estimated Tax for 2010
.

Military retirees.
Military retirement pay is treated in the same manner as regular pay for income tax withholding purposes, even though
it is treated as a pension or annuity for other tax purposes.
Household workers.
If you are a household worker, you can ask your employer to withhold income tax from your pay. A household worker
is an employee who performs household work in a private home, local college club, local fraternity or sorority chapter.Tax is withheld only if you want it withheld and your employer agrees to withhold it. If you do not have enough income
tax withheld, you may have to pay estimated tax, as discussed later under
Estimated Tax for 2010.
Farmworkers.
Income tax generally is withheld from your cash wages for work on a farm unless your employer both:

  • Pays you cash wages of less than $150 during the year, and
  • Has expenditures for agricultural labor totaling less than $2,500 during the year.
Differential wage payments.
When employees are on leave from employment for military duty, some employers may make up the difference between
the military pay and civilian pay. Payments made after December 31, 2008, to an employee who is on active duty for a period
of more than 30 days, will be subject to income tax withholding, but not subject to social security or Medicare taxes. The
wages and withholding will be reported on Form W-2, Wage and Tax Statement.

Determining Amount of Tax Withheld Using Form W-4

The amount of income tax your employer withholds from your regular pay depends on two things.

  • The amount you earn in each payroll period.
  • The information you give your employer on Form W-4.

Form W-4 includes four types of information that your employer will use to figure your withholding.

  • Whether to withhold at the single rate or at the lower married rate.
  • How many withholding allowances you claim (each allowance reduces the amount withheld).
  • Whether you want an additional amount withheld.
  • Whether you are claiming an exemption from withholding. See
    Exemption From Withholding
    , later.

Note.

You must specify a filing status and a number of withholding allowances on Form W-4. You cannot specify only a dollar amount
of withholding.

New Job

When you start a new job, you must fill out Form W-4 and give it to your employer. Your employer should have copies of the
form. If you need to change the information later, you must fill out a new form.

If you work only part of the year (for example, you start working after the beginning of the year), too much tax may be withheld.
You may be able to avoid overwithholding if your employer agrees to use the part-year method. See Part-Year Method in chapter 1 of Publication 505 for more information.

Employee also receiving pension income.
If you receive pension or annuity income and begin a new job, you will need to file Form W-4 with your new employer.
However, you can choose to split your withholding allowances between your pension and job in any manner. See Publication 919
for more information.

Changing Your Withholding

During the year changes may occur to your marital status, exemptions, adjustments, deductions, or credits you expect to claim
on your tax return. When this happens, you may need to give your employer a new Form W-4 to change your withholding status
or number of allowances.

If the changes reduce the number of allowances you are claiming or changes your marital status from married to single, you
must give your employer a new Form W-4 within 10 days.

Generally, you can submit a new Form W-4 whenever you wish to change the number of your withholding allowances for any other
reason.

Changing your withholding for 2011.
If events in 2010 will decrease the number of your withholding allowances for 2011, you must give your employer a
new Form W-4 by December 1, 2010. If the event occurs in December 2010, submit a new Form W-4 within 10 days.

Checking Your Withholding

After you have given your employer a Form W-4, you can check to see whether the amount of tax withheld from your pay is too
little or too much. See
Publication 919
, later. If too much or too little tax is being withheld, you should give your employer a new Form W-4 to change your withholding.

Note.

You cannot give your employer a payment to cover withholding on salaries and wages for past pay periods or a payment for estimated
tax.

Completing Form W-4 and Worksheets

Form W-4 has worksheets to help you figure how many withholding allowances you can claim. The worksheets are for your own
records. Do not give them to your employer.

Multiple jobs.
If you have income from more than one job at the same time, complete only one set of Form W-4 worksheets. Then split
your allowances between the Forms W-4 for each job. You cannot claim the same allowances with more than one employer at the
same time. You can claim all your allowances with one employer and none with the other(s), or divide them any other way.
Married individuals.
If both you and your spouse are employed and expect to file a joint return, figure your withholding allowances using
your combined income, adjustments, deductions, exemptions, and credits. Use only one set of worksheets. You can divide your
total allowances any way, but you cannot claim an allowance that your spouse also claims.If you and your spouse expect to file separate returns, figure your allowances using separate worksheets based on
your own individual income, adjustments, deductions, exemptions, and credits.
Alternative method of figuring withholding allowances.
You do not have to use the Form W-4 worksheets if you use a more accurate method of figuring the number of withholding
allowances. For more information, see Alternative method of figuring withholding allowances under Completing Form W-4 and Worksheets in Publication 505, chapter 1.
Personal Allowances Worksheet.
Use the Personal Allowances Worksheet on page 1 of Form W-4 to figure your withholding allowances based on exemptions
and any special allowances that apply.
Deductions and Adjustments Worksheet.
Use this worksheet if you plan to itemize your deductions, claim certain credits, or claim adjustments to the income
on your 2010 tax return and you want to reduce your withholding. Also, complete this worksheet when you have changes to these
items to see if you need to change your withholding.The Deductions and Adjustments Worksheet is on page 2 of Form W-4. Chapter 1 of Publication 505 explains this worksheet.
Two-Earners/Multiple Jobs Worksheet.
You may need to complete this worksheet if you have more than one job or a working spouse. Also, on line 8 of this
worksheet you can add any additional withholding necessary to cover any amount you expect to owe other than income tax, such
as self-employment tax.

Getting the Right Amount of Tax Withheld

In most situations, the tax withheld from your pay will be close to the tax you figure on your return if you follow these
two rules.

  • You accurately complete all the Form W-4 worksheets that apply to you.
  • You give your employer a new Form W-4 when changes occur.

But because the worksheets and withholding methods do not account for all possible situations, you may not be getting the
right amount withheld. This is most likely to happen in the following situations.

  • You are married and both you and your spouse work.
  • You have more than one job at a time.
  • You have nonwage income, such as interest, dividends, alimony, unemployment compensation, or self-employment income.
  • You will owe additional amounts with your return, such as self-employment tax.
  • Your withholding is based on obsolete Form W-4 information for a substantial part of the year.
  • Your earnings are more than $130,000 if you are single or $180,000 if you are married.
  • You work only part of the year.
  • You change the number of your withholding allowances during the year.
Cumulative wage method.
If you change the number of your withholding allowances during the year, too much or too little tax may have been
withheld for the period before you made the change. You may be able to compensate for this if your employer agrees to use
the cumulative wage withholding method for the rest of the year. You must ask your employer in writing to use this method.To be eligible, you must have been paid for the same kind of payroll period (weekly, biweekly, etc.) since the beginning
of the year.

Publication 919

To make sure you are getting the right amount of tax withheld, get Publication 919. It will help you compare the total tax
to be withheld during the year with the tax you can expect to figure on your return. It also will help you determine how much
additional withholding, if any, is needed each payday to avoid owing tax when you file your return. If you do not have enough
tax withheld, you may have to pay estimated tax, as explained under
Estimated Tax for 2010
, later.

Rules Your Employer Must Follow

It may be helpful for you to know some of the withholding rules your employer must follow. These rules can affect how to fill
out your Form W-4 and how to handle problems that may arise.

New Form W-4.
When you start a new job, your employer should give you a Form W-4 to fill out. Beginning with your first payday,
your employer will use the information you give on the form to figure your withholding.If you later fill out a new Form W-4, your employer can put it into effect as soon as possible. The deadline for putting
it into effect is the start of the first payroll period ending 30 or more days after you turn it in.
No Form W-4.
If you do not give your employer a completed Form W-4, your employer must withhold at the highest rate, as if you
were single and claimed no withholding allowances.
Repaying withheld tax.
If you find you are having too much tax withheld because you did not claim all the withholding allowances you are
entitled to, you should give your employer a new Form W-4. Your employer cannot repay any of the tax previously withheld.
Instead, claim the full amount withheld when you file your tax return.However, if your employer has withheld more than the correct amount of tax for the Form W-4 you have in effect, you
do not have to fill out a new Form W-4 to have your withholding lowered to the correct amount. Your employer can repay the
amount that was withheld incorrectly. If you are not repaid, your Form W-2 will reflect the full amount actually withheld,
which you would claim when you file your tax return.

Exemption From Withholding

If you claim exemption from withholding, your employer will not withhold federal income tax from your wages. The exemption
applies only to income tax, not to social security or Medicare tax.

You can claim exemption from withholding for 2010 only if both of the following situations apply.

  • For 2009 you had a right to a refund of all federal income tax withheld because you had no tax liability.
  • For 2010 you expect a refund of all federal income tax withheld because you expect to have no tax liability.
Students.
If you are a student, you are not automatically exempt. See chapter 1 to find out if you must file a return. If you work only part time or only during the summer, you may qualify for exemption
from withholding.
Age 65 or older or blind.
If you are 65 or older or blind, use Worksheet 1-1 or 1-2 in chapter 1 of Publication 505, to help you decide if you
qualify for exemption from withholding. Do not use either worksheet if you will itemize deductions, claim exemptions for dependents,
or claim tax credits on your 2010 return. Instead, see Itemizing deductions or claiming exemptions or credits in chapter 1 of Publication 505.
Claiming exemption from withholding.
To claim exemption, you must give your employer a Form W-4. Do not complete lines 5 and 6. Enter “Exempt” on line 7.If you claim exemption, but later your situation changes so that you will have to pay income tax after all, you must
file a new Form W-4 within 10 days after the change. If you claim exemption in 2010, but you expect to owe income tax for
2011, you must file a new Form W-4 by December 1, 2010.Your claim of exempt status may be reviewed by the IRS.

An exemption is good for only 1 year.
You must give your employer a new Form W-4 by February 15 each year to continue your exemption.

Supplemental Wages

Supplemental wages include bonuses, commissions, overtime pay, vacation allowances, certain sick pay, and expense allowances
under certain plans. The payer can figure withholding on supplemental wages using the same method used for your regular wages.
However, if these payments are identified separately from your regular wages, your employer or other payer of supplemental
wages can withhold income tax from these wages at a flat rate.

Expense allowances.
Reimbursements or other expense allowances paid by your employer under a nonaccountable plan are treated as supplemental
wages.Reimbursements or other expense allowances paid under an accountable plan that are more than your proven expenses
are treated as paid under a nonaccountable plan if you do not return the excess payments within a reasonable period of time.For more information about accountable and nonaccountable expense allowance plans, see
Reimbursements
in chapter 26.

Penalties

You may have to pay a penalty of $500 if both of the following apply.

  • You make statements or claim withholding allowances on your Form W-4 that reduce the amount of tax withheld.
  • You have no reasonable basis for those statements or allowances at the time you prepare your Form W-4.

There is also a criminal penalty for willfully supplying false or fraudulent information on your Form W-4 or for willfully
failing to supply information that would increase the amount withheld. The penalty upon conviction can be either a fine of
up to $1,000 or imprisonment for up to 1 year, or both.

These penalties will apply if you deliberately and knowingly falsify your Form W-4 in an attempt to reduce or eliminate the
proper withholding of taxes. A simple error or an honest mistake will not result in one of these penalties. For example, a
person who has tried to figure the number of withholding allowances correctly, but claims seven when the proper number is
six, will not be charged a W-4 penalty.

Tips

The tips you receive while working on your job are considered part of your pay. You must include your tips on your tax return
on the same line as your regular pay. However, tax is not withheld directly from tip income, as it is from your regular pay.
Nevertheless, your employer will take into account the tips you report when figuring how much to withhold from your regular
pay.

See chapter 6 for information on reporting your tips to your employer. For more information on the withholding rules for tip income, see
Publication 531, Reporting Tip Income.

How employer figures amount to withhold.
The tips you report to your employer are counted as part of your income for the month you report them. Your employer
can figure your withholding in either of two ways.

  • By withholding at the regular rate on the sum of your pay plus your reported tips.
  • By withholding at the regular rate on your pay plus a percentage of your reported tips.
Not enough pay to cover taxes.
If your regular pay is not enough for your employer to withhold all the tax (including income tax and social security
and Medicare taxes (or the equivalent railroad retirement tax) due on your pay plus your tips, you can give your employer
money to cover the shortage. See
Giving your employer money for taxes
in chapter 6.
Allocated tips.
Your employer should not withhold income tax, social security tax, Medicare tax, or railroad retirement tax on any
allocated tips. Withholding is based only on your pay plus your reported tips. Your employer should refund to you any incorrectly
withheld tax. See
Allocated Tips
in chapter 6 for more information.

Taxable Fringe Benefits

The value of certain noncash fringe benefits you receive from your employer is considered part of your pay. Your employer
generally must withhold income tax on these benefits from your regular pay.

For information on fringe benefits, see
Fringe Benefits under Employee Compensation in chapter 5.

Although the value of your personal use of an employer-provided car, truck, or other highway motor vehicle is taxable, your
employer can choose not to withhold income tax on that amount. Your employer must notify you if this choice is made.

For more information on withholding on taxable fringe benefits, see chapter 1 of Publication 505.

Sick Pay

Sick pay is a payment to you to replace your regular wages while you are temporarily absent from work due to sickness or personal
injury. To qualify as sick pay, it must be paid under a plan to which your employer is a party.

If you receive sick pay from your employer or an agent of your employer, income tax must be withheld. An agent who does not
pay regular wages to you may choose to withhold income tax at a flat rate.

However, if you receive sick pay from a third party who is not acting as an agent of your employer, income tax will be withheld
only if you choose to have it withheld. See
Form W-4S, below.

If you receive payments under a plan in which your employer does not participate (such as an accident or health plan where
you paid all the premiums), the payments are not sick pay and usually are not taxable.

Union agreements.
If you receive sick pay under a collective bargaining agreement between your union and your employer, the agreement
may determine the amount of income tax withholding. See your union representative or your employer for more information.
Form W-4S.
If you choose to have income tax withheld from sick pay paid by a third party, such as an insurance company, you must
fill out Form W-4S. Its instructions contain a worksheet you can use to figure the amount you want withheld. They also explain
restrictions that may apply.Give the completed form to the payer of your sick pay. The payer must withhold according to your directions on the
form.
Estimated tax.
If you do not request withholding on Form W-4S, or if you do not have enough tax withheld, you may have to make estimated
tax payments. If you do not pay enough tax, either through estimated tax or withholding, or a combination of both, you may
have to pay a penalty. See
Underpayment Penalty for 2009 at the end of this chapter.

Pensions and Annuities

Income tax usually will be withheld from your pension or annuity distributions unless you choose not to have it withheld.
This rule applies to distributions from:

  • A traditional individual retirement arrangement (IRA),
  • A life insurance company under an endowment, annuity, or life insurance contract,
  • A pension, annuity, or profit-sharing plan,
  • A stock bonus plan, and
  • Any other plan that defers the time you receive compensation.

The amount withheld depends on whether you receive payments spread out over more than 1 year (periodic payments), within 1
year (nonperiodic payments), or as an eligible rollover distribution (ERD). Income tax withholding from an ERD is mandatory.

More information.For more information on taxation of annuities and distributions (including ERDs) from qualified retirement plans, see chapter 10. For information on IRAs, see chapter 17. For more information on withholding on pensions and annuities, including a discussion of Form W-4P, see Pensions and Annuities in chapter 1 of Publication 505.

Gambling Winnings

Income tax is withheld at a flat 25% rate from certain kinds of gambling winnings.

Gambling winnings of more than $5,000 from the following sources are subject to income tax withholding.

  • Any sweepstakes; wagering pool, including payments made to winners of poker tournaments; or lottery.
  • Any other wager, if the proceeds are at least 300 times the amount of the bet.

It does not matter whether your winnings are paid in cash, in property, or as an annuity. Winnings not paid in cash are taken
into account at their fair market value.

Exception.
Gambling winnings from bingo, keno, and slot machines generally are not subject to income tax withholding. However,
you may need to provide the payer with a social security number to avoid withholding. See Backup withholding on gambling winnings in chapter 1 of Publication 505. If you receive gambling winnings not subject to withholding, you may need to pay estimated
tax. See Estimated Tax for 2010, later.

If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a
penalty. See Underpayment Penalty for 2009, later.

Form W-2G.
If a payer withholds income tax from your gambling winnings, you should receive a Form W-2G, Certain Gambling Winnings,
showing the amount you won and the amount withheld. Report the tax withheld on line 61 of Form 1040.

Unemployment Compensation

You can choose to have income tax withheld from unemployment compensation. To make this choice, fill out Form W-4V (or a similar
form provided by the payer) and give it to the payer.

All unemployment compensation is taxable. So, if you do not have income tax withheld, you may have to pay estimated tax. See

Estimated Tax for 2010, later.

If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a
penalty. See , later, for information.

Federal Payments

You can choose to have income tax withheld from certain federal payments you receive. These payments are:

  1. Social security benefits,
  2. Tier 1 railroad retirement benefits,
  3. Commodity credit corporation loans you choose to include in your gross income, and
  4. Payments under the Agricultural Act of 1949 (7 U.S.C. 1421 et. seq.), as amended, or title II of the Disaster Assistance Act
    of 1988, that are treated as insurance proceeds and that you receive because:

    1. Your crops were destroyed or damaged by drought, flood, or any other natural disaster, or
    2. You were unable to plant crops because of a natural disaster described in (a).

To make this choice, fill out Form W-4V (or a similar form provided by the payer) and give it to the payer.

If you do not choose to have income tax withheld, you may have to pay estimated tax. See
Estimated Tax for 2010, later.

If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a
penalty. See
Underpayment Penalty for 2009, at the end of this chapter, for information.

More information.
For more information about the tax treatment of social security and railroad retirement benefits, see chapter 11. Get Publication 225, Farmer’s Tax Guide, for information about the tax treatment of commodity credit corporation loans or
crop disaster payments.

Backup Withholding


Banks or other businesses that pay you certain kinds of income must file an information return (Form 1099) with the IRS. The
information return shows how much you were paid during the year. It also includes your name and taxpayer identification number
(TIN). TINs are explained in chapter 1 under
Social Security Number.

These payments generally are not subject to withholding. However, “backup” withholding is required in certain situations. Backup withholding can apply to most kinds of payments that are reported
on Form 1099.

The payer must withhold at a flat 28% rate in the following situations.

  • You do not give the payer your TIN in the required manner.
  • The IRS notifies the payer that the TIN you gave is incorrect.
  • You are required, but fail, to certify that you are not subject to backup withholding.
  • The IRS notifies the payer to start withholding on interest or dividends because you have underreported interest or dividends
    on your income tax return. The IRS will do this only after it has mailed you four notices over at least a 210-day period.

See Backup Withholding in chapter 1 of Publication 505 for more information.

Penalties.
There are civil and criminal penalties for giving false information to avoid backup withholding. The civil penalty
is $500. The criminal penalty, upon conviction, is a fine of up to $1,000 or imprisonment of up to 1 year, or both.

Estimated Tax for 2010

Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment,
interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You also may have to pay estimated
tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your
tax return. If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have
to pay a penalty. If you do not pay enough by the due date of each payment period (see
When To Pay Estimated Tax
, later), you may be charged a penalty even if you are due a refund when you file your tax return. For information on when
the penalty applies, see
Underpayment Penalty for 2009
, at the end of this chapter.

Who Does Not Have To Pay Estimated Tax

If you receive salaries or wages, you can avoid having to pay estimated tax by asking your employer to take more tax out of
your earnings. To do this, give a new Form W-4 to your employer. See chapter 1 of Publication 505.

Estimated tax not required.
You do not have to pay estimated tax for 2010 if you meet all three of the following conditions.

  • You had no tax liability for 2009.
  • You were a U.S. citizen or resident for the whole year.
  • Your 2009 tax year covered a 12-month period.

You had no tax liability for 2009 if your total tax was zero or you did not have to file an income tax return. For
the definition of “total tax,” see Total tax for 2009—line 14b in Publication 505, chapter 2.

Who Must Pay Estimated Tax

If you owe additional tax for 2009, you may have to pay estimated tax for 2010.

You can use the following general rule as a guide during the year to see if you will have enough withholding, or if you should
increase your withholding or make estimated tax payments.

General rule.
In most cases, you must pay estimated tax for 2010 if both of the following apply.

  1. You expect to owe at least $1,000 in tax for 2010, after subtracting your withholding and refundable credits.
  2. You expect your withholding plus your refundable credits to be less than the smaller of:
    1. 90% of the tax to be shown on your 2010 tax return, or
    2. 100% of the tax shown on the your 2009 tax return. Your 2009 tax return must cover all 12 months.


If the result from using the general rule above suggests that you will not have enough withholding, complete the 2010 Estimated
Tax Worksheet in the instructions to Form 1040-ES for a more accurate calculation.

Special rules for farmers, fishermen, and higher income taxpayers.
If at least two-thirds of your gross income for 2009 or 2010 is from farming or fishing, substitute 662/3% for 90% in (2a) under the General Rule earlier. If your AGI for 2009 was more than $150,000 ($75,000 if your filing status for 2010 is married filing a separate
return), substitute 110% for 100% in (2b) under
General rule
, earlier. See Figure 4-A, later, and Publication 505, chapter 2 for more information.
Aliens.Resident and nonresident aliens also may have to pay estimated tax. Resident aliens should follow the rules in this chapter
unless noted otherwise. Nonresident aliens should get Form 1040-ES (NR), U.S. Estimated Tax for Nonresident Alien Individuals.You are an alien if you are not a citizen or national of the United States. You are a resident alien if you either
have a green card or meet the substantial presence test. For more information about the substantial presence test, see Publication
519, U.S. Tax Guide for Aliens.

Married taxpayers.
If you qualify to make joint estimated tax payments, apply the rules discussed here to your joint estimated income.You and your spouse can make joint estimated tax payments even if you are not living together.However, you and your spouse cannot make joint estimated tax payments if:

  • You are legally separated under a decree of divorce or separate maintenance,
  • You and your spouse have different tax years, or
  • Either spouse is a nonresident alien (unless that spouse elected to be treated as a resident alien for tax purposes (see chapter
    1 of Publication 519)).

If you do not qualify to make joint estimated tax payments, apply these rules to your separate estimated income. Making
joint or separate estimated tax payments will not affect your choice of filing a joint tax return or separate returns for
2010.

2009 separate returns and 2010 joint return.
If you plan to file a joint return with your spouse for 2010, but you filed separate returns for 2009, your 2009 tax
is the total of the tax shown on your separate returns. You filed a separate return if you filed as single, head of household,
or married filing separately.
2009 joint return and 2010 separate returns.
If you plan to file a separate return for 2010 but you filed a joint return for 2009, your 2009 tax is your share
of the tax on the joint return. You file a separate return if you file as single, head of household, or married filing separately.To figure your share of the tax on the joint return, first figure the tax both you and your spouse would have paid
had you filed separate returns for 2009 using the same filing status as for 2010. Then multiply the tax on the joint return
by the following fraction.

The tax you would have paid had you filed a separate return
The total tax you and your spouse would have paid had you filed separate returns

Example.

Joe and Heather filed a joint return for 2009 showing taxable income of $48,500 and a tax of $6,444. Of the $48,500 taxable
income, $40,100 was Joe’s and the rest was Heather’s. For 2010, they plan to file married filing separately. Joe figures his
share of the tax on the 2009 joint return as follows.

Tax on $40,100 based on a separate return $6,219
Tax on $8,400 based on a separate return 846
Total $ 7,065
Joe’s percentage of total ($6,219 ÷ $7,065) 88%
Joe’s share of tax on joint return
($6,444 × 88%)
$ 5,671

Figure 4-A. Do You Have To Pay Estimated Tax?

Figure 4-A Do You Have To Pay Estimated Tax?

How To Figure Estimated Tax

To figure your estimated tax, you must figure your expected adjusted gross income (AGI), taxable income, taxes, deductions,
and credits for the year.

When figuring your 2010 estimated tax, it may be helpful to use your income, deductions, and credits for 2009 as a starting
point. Use your 2009 federal tax return as a guide. You can use Form 1040-ES to figure your estimated tax. Nonresident aliens
use Form 1040-ES (NR) to figure estimated tax (see chapter 8 of Publication 519 for more information).

You must make adjustments both for changes in your own situation and for recent changes in the tax law. For 2010, there are
several changes in the law. For a discussion of these changes, visit the IRS website at www.irs.gov.

Form 1040-ES includes a worksheet to help you figure your estimated tax. Keep the worksheet for your records.

For more complete information and examples of how to figure your estimated tax for 2010, see chapter 2 of Publication 505.

When To Pay Estimated Tax

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If
you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due
a refund when you file your income tax return. The payment periods and due dates for estimated tax payments are shown next.

For the period: Due date:
Jan. 1* – March 31 April 15
April 1 – May 31 June 15
June 1 – August 31 Sept. 15
Sept. 1– Dec. 31 January 15 next year**

*If your tax year does not begin on January 1,
see the Form 1040-ES instructions.
**See
January payment
, later.
Saturday, Sunday, holiday rule.
If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on
time if you make it on the next day that is not a Saturday, Sunday, or legal holiday. In 2011, January 15 is a Saturday and
Monday, January 17, is a holiday. The January 15 payment is due by January 18, 2011.
January payment.
If you file your 2010 Form 1040 or Form 1040A by January 31, 2011, and pay the rest of the tax you owe, you do not
need to make the payment due on January 18, 2011.
Fiscal year taxpayers.
If your tax year does not start on January 1, see the Form 1040-ES instructions for your payment due dates.

When To Start

You do not have to make estimated tax payments until you have income on which you will owe the tax. If you have income subject
to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period.
You can pay all your estimated tax at that time, or you can pay it in installments. If you choose to pay in installments,
make your first payment by the due date for the first payment period. Make your remaining installment payments by the due
dates for the later periods.

No income subject to estimated tax during first period.If you do not have income subject to estimated tax until a later payment period, you must make your first payment by the due
date for that period. You can pay your entire estimated tax by the due date for that period or you can pay it in installments
by the due date for that period and the due dates for the remaining periods. The following chart shows when to make installment
payments.

If you first have income on which you must pay estimated tax: Make a
payment
by:*
Make later
installments
by:*
Before April 1 April 15 June 15
Sept. 15
Jan. 15 next year
April 1–May 31 June 15 Sept. 15
Jan. 15 next year
June 1–Aug. 31 Sept. 15 Jan. 15 next year
After Aug. 31 Jan. 15
next year
(None)

*See
January payment
and
Saturday, Sunday, holiday rule
, earlier.
How much to pay to avoid a penalty.
To determine how much you should pay by each payment due date, see How To Figure Each Payment, next.

How To Figure Each Payment

You should pay enough estimated tax by the due date of each payment period to avoid a penalty for that period. You can figure
your required payment for each period by using either the regular installment method or the annualized income installment
method. These methods are described in chapter 2 of Publication 505. If you do not pay enough during each payment period,
you may be charged a penalty even if you are due a refund when you file your tax return.

If the earlier discussion of
No income subject to estimated tax during first period
or the later discussion of
Change in estimated tax
applies to you, you may benefit from reading Annualized Income Installment Method in chapter 2 of Publication 505 for information on how to avoid a penalty.

Underpayment penalty.
Under the regular installment method, if your estimated tax payment for any period is less than one-fourth of your
estimated tax, you may be charged a penalty for underpayment of estimated tax for that period when you file your tax return.
Under the annualized income installment method, your estimated tax payments vary with your income, but the amount required
must be paid each period. See chapter 4 of Publication 505 for more information.
Change in estimated tax.
After you make an estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may
make it necessary for you to refigure your estimated tax. Pay the unpaid balance of your amended estimated tax by the next
payment due date after the change or in installments by that date and the due dates for the remaining payment periods.

Estimated Tax Payments Not Required

You do not have to pay estimated tax if your withholding in each payment period is at least as much as:

  • One-fourth of your required annual payment, or
  • Your required annualized income installment for that period.

You also do not have to pay estimated tax if you will pay enough through withholding to keep the amount you owe with your
return under $1,000.

How To Pay Estimated Tax

There are five ways to pay estimated tax.

  • Credit an overpayment on your 2009 return to your 2010 estimated tax.
  • Send in your payment (check or money order) with a payment voucher from Form 1040-ES.
  • Pay electronically using the Electronic Federal Tax Payment System (EFTPS).
  • Pay by electronic funds withdrawal if you are filing Form 1040 or Form 1040A electronically.
  • Pay by credit or debit card using a pay-by-phone system or the Internet.

Credit an Overpayment

If you show an overpayment of tax after completing your Form 1040 or Form 1040A for 2009, you can apply part or all of it
to your estimated tax for 2010. On line 74 of Form 1040, or line 47 of Form 1040A, enter the amount you want credited to your
estimated tax rather than refunded. Take the amount you have credited into account when figuring your estimated tax payments.

You cannot have any of that amount refunded to you until you file your tax return for the following year. You also cannot
use that overpayment in any other way.

Pay by Check or Money Order Using the Estimated Tax Payment Voucher

Each payment of estimated tax by check or money order must be accompanied by a payment voucher from Form 1040-ES. If you made
estimated tax payments last year and did not use a paid preparer to file your return, you should receive a copy of the 2010
Form 1040-ES in the mail. It will contain payment vouchers preprinted with your name, address, and social security number.
Using the preprinted vouchers will speed processing, reduce the chance of error, and help save processing costs.

Use the window envelopes that came with your Form 1040-ES package. If you use your own envelopes, make sure you mail your
payment vouchers to the address shown in the Form 1040-ES instructions for the place where you live.

If you did not pay estimated tax last year, you can order Form 1040-ES from the IRS (see inside back cover of this publication)
or download it from the IRS website at www.irs.gov. Follow the instructions in the package to make sure you use the vouchers correctly.

 

Do not use the address shown in the Form 1040 or Form 1040A instructions.

If you file a joint return and are making joint estimated tax payments, enter the names and social security numbers on the
payment voucher in the same order as they will appear on the joint return.

Change of address.
You must notify the IRS if you are making estimated tax payments and you changed your address during the year. Send
a clear and concise written statement to the Internal Revenue Service Center where you filed your last return and provide
all of the following.

  • Your full name (and spouse’s full name).
  • Your signature (and spouse’s signature).
  • Your old address (and spouse’s old address if different).
  • Your new address.
  • Your social security number (and spouse’s social security number).

You can use Form 8822, Change of Address, for this purpose.

Pay Electronically

If you want to make estimated payments by using EFTPS, by electronic funds withdrawal, or by credit or debit card, see the
Form 1040-ES instructions or How To Pay Estimated Tax in chapter 2 of Publication 505.

What’s on the IRS Competency Exam?

Why US over the competition?