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WHAT
IS ‘ESTIMATED TAX’?
The
tax law is structured to require the payment of “estimated tax”.
The
premise is that you will have some income tax liability and so, a pay
as you go
system is in place to ensure that the government collects the tax as early as
possible.
You may pay your
estimated taxes through withholding at the source, through ‘quarterly’
estimated tax payments, or a combination of both.
Technically,
“estimated tax payments” include
withholding
at the source.
When most
people refer to estimated taxes they are thinking about the ‘quarterly’
payments.
(We will
try to not confuse you.)
To
‘encourage’ you to pay the proper amount of estimated tax the tax law
provides for a penalty if you do not.
The
law provides for three alternative methods of calculating the amount of
estimated tax payments to avoid any penalty.
The amount of your estimated tax
payments for the year under these methods may or may not be close in amount to
your actual tax liability for the year.
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