Individual Estimated Tax Information

Individual Estimated Tax

This article explains why it is necessary for you to make estimated tax payments and the applicable rules for paying the minimum amount of estimated tax without triggering the penalty for underpayment of estimated tax.

The underpayment penalty doesn’t apply to you:

(1) if the total tax shown on your return is less than $1,000 after subtracting withholding tax paid;

(2) if you were a U.S. citizen or resident for the entire preceding year, that year was 12 months, and you had no tax liability for that year;

(3) if you are a farmer or fisherman and pay your entire estimated tax by Jan. 15 of the following year, or pay your entire estimated tax by Mar. 1 of the following year and also file your tax return by that date; or

(4) for the fourth (Jan. 15) installment, if you aren’t a farmer or fisherman, file your return by Jan. 31 of the following year, and pay your tax in full.

Individual Estimated Tax Help

In addition, IRS may waive the penalty if the failure was due to casualty, disaster, or other unusual circumstances and it would be inequitable or against good conscience to impose the penalty. The penalty can also be waived for reasonable cause during the first two years after you retire (after reaching age 62) or become disabled.

Individuals must pay 25% of a “required annual payment” by Apr. 15, June 15, Sept. 15, and Jan. 15, to avoid an underpayment penalty. (When that date falls on a weekend or holiday, the payment is due on the next business day.) The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. Certain high-income individuals must meet a more rigorous requirement. If the adjusted gross income on your previous year’s return is over $150,000 (over $75,000 if you are married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

Most individuals make estimated tax payments in four installments. In other words, we determine the required annual payment, then divide that number by four and make four equal payments by the due dates. But you may be able to make smaller payments under the annualized income method. This method is useful to people whose income flow is not uniform over the year, perhaps because of a seasonal business. For example, if your income comes exclusively from a business that you operate in a resort area during June, July, and Aug., no estimated payment is required before Sept. 15. You may also want to use the annualized income method if a significant portion of your income comes from capital gains on the sale of securities which you sell at various times during the year.

Most people who receive the bulk of their income in the form of wages satisfy these payment requirements through the tax withheld by their employer from their paycheck.

If you fail to make the required payments, you may be subject to an underpayment penalty. The penalty equals the product of the interest rate charged by IRS on deficiencies, times the amount of the underpayment for the period of the underpayment. The penalty is avoided if you meet certain specified exceptions or waivers, described above.


Is Your Worker an Independent Contractor or an Employee?

There is no set definition of the term, “employee.” While determining whether an employee is an independent contractor or a regular employee is crucial factual information, the label is also a complex one.  In the event that a worker is an employee of a company, the employer is required to pay FICA taxes on the employee’s wages, pay FUTA tax, and typically provide the employee with the same fringe benefits as the company’s other employees. In addition to this, the state tax obligations apply to an employee as well.  However, independent contractors do not carry the same requirements; the company is only required to send a 1099-MISC form to the independent contractor that shows his or her wages, provided that the total is over $600.

An independent contractor is generally someone is not controlled by the company regarding his job’s nature and procedure.  If the company reserves the right to control and direct his job, as well as his job’s procedures, then the person is generally considered an employee. These terms and definitions originate from court cases, not tax code, hence the complexity.

Section 530 of the ’78 Revenue Act, which is different from the Internal Revenue Code, relieves employers from employment tax liabilities if they have mistakenly classified workers as independent contractors.  Section 530 only applies under the following conditions: the employer had a “reasonable basis” for not treating the worker as an employee, company filed all federal returns consistently with its treatment of a worker as an independent contractor and treated all similarly situated workers as independent contractors as well.  The “reasonable basis” can be used if the employer has traditionally treated similar workers as independent contractors for a significant period of the employer’s industry. This section does not apply to certain types of technical services workers.

Individuals who are specifically identified by the tax code as being employees, or “statutory employees,” are treated as employees for social security tax purposes. This applies even if they aren’t subject to an employer’s direction and control, or, considered “employees” by common-law rules.  Home workers, full-time traveling or city salespeople, agent and commission drivers, and life insurance salespeople are included as statutory employees.  For non-FICA purposes, statutory employees may or may not be employees; however, corporate officers are statutory employees for all purposes.

Those who are specifically identified by tax code as being non-employees, or statutory independent contractors, are not considered employees for the purposes of FUTA or FICA, income tax rules in general, or wage withholding. These workers are certain direct sellers and qualified real estate agents.

Corporate directors are examples of individuals subject to special rules, due to their occupations or identities.  Corporate directors are treated as self-employed persons because of their capacity as directors of a corporation. Partners of an enterprise organized corporation are treated in the same fashion.

You may refer to Form SS-8 when asking the IRS to decide which worker is an employee or independent contractor, under certain circumstances.

Take care to properly classify your workers as employees or independent contractors.


A Certified Public Accounting firm, Baker and Company, PC is located near downtown Dallas. Ford Baker, owner, has been a CPA serving the DFW Metroplex, Plano, Collin County, and all of North Texas since 1987. The firm has many professionals ready to help small businesses and individuals on taxation issues, tax preparation, small business accounting using QuickBooks, PeachTree, and a variety of other solutions and/or assistance with financial statement preparation and reporting to lenders. For more information about this article or what we can do to help you, please feel free to contact our office at 214.827.9118 or visit our website at