The federal income tax is a pay-as-you-go tax. You must pay
the tax as you earn or receive income during the year. There are two ways to
pay as you go, either by employer withholding or estimated tax payments.
Employer withholding. If you are an employee, your employer
generally withholds income tax from your pay. In addition, tax may be withheld
from certain other income such as pensions, bonuses, commissions, and gambling
winnings. If all of your income will be subject to income tax withholding, you
probably do not need to pay estimated tax. Events during the year may change
your marital status or exemptions, adjustments, deductions, or credits you
expect to claim on your tax return. When this happens, you should complete a
new Form W-4, Employee’s Withholding
Allowance Certificate, so that the appropriate amount of tax is withheld.
Estimated tax. 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, rents, 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 not only income tax, but
selfemployment tax and alternative minimum tax as well. If you do not pay
enough by the due date of each quarterly payment period you may be charged a
penalty even if you are due a refund when you file your tax return.
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