Taxpayers are required to pay most of their tax obligation during the year by having tax withheld from their paychecks or pension payments, or by making estimated tax payments. Estimated tax is the primary method used to pay tax on income that isn't subject to withholding. This typically includes income from self-employment, interest, dividends, pension income, and gain from the sale of assets.
Other than income from self-employment, often it’s people in retirement who generate this kind of income and will need to pay estimated taxes. Estimated tax can be used to pay both income tax and self-employment tax, as well as other taxes reported on your income tax return.
Generally, you must pay federal estimated tax for the current year if: (1) you expect to owe at least $1,000 in tax for the current year, and (2) you expect your tax withholding to be less than the smaller of (a) 90% of the tax on your tax return for the current year, or (b) 100% of the tax on your tax return for the previous year. (or 110% of the tax on your tax return for the previous year if your AGI was more than $150,000).
If all of your income is subject to withholding, you probably don't need to pay estimated tax. This means if you have taxes withheld by an employer, you may be able to avoid having to make estimated tax payments, even on your nonwage income, by increasing the amount withheld from your paycheck.
You can use Form 1040-ES and its worksheets to figure your estimated tax. They can help you determine the amount you should pay for the year through withholding and estimated tax payments to avoid paying a penalty.
The year is divided into four payment periods. After you have determined your total estimated tax for the year, you then determine how much you should pay by the due date of each payment period to avoid a penalty for that period. In most cases you would pay the same amount for each quarter, but if you earn income unevenly throughout the year you would need to calculate the amount for each quarter. If you don't pay enough during any payment period, you may owe a penalty even if you are due a refund when you file your tax return.
Withholding and estimated tax payments may also be required for state and local taxes but remember IL does not tax pension income or income from pre-tax retirement accounts, so you wouldn’t need to put this income in your calculation.
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