Estimated Tax: A Comprehensive Guide to Your Tax Responsibilities
Definition & Meaning
Estimated tax is a system of advance payments made towards your income tax liability. This applies to income that is not subject to withholding taxes, such as self-employment income, dividends, rental income, interest income, and capital gains. The amount you pay is typically based on your tax liability from the previous year or an estimate of your current year's tax liability. These payments are made quarterly to ensure you meet your tax obligations throughout the year.
Legal Use & context
Estimated tax is commonly used in tax law, particularly for individuals who have income not subject to withholding. This includes freelancers, business owners, and investors. It is essential for managing tax responsibilities and avoiding penalties for underpayment. Users can manage their estimated tax payments using legal templates provided by platforms like US Legal Forms, which offer resources for calculating and submitting these payments correctly.
Real-world examples
Here are a couple of examples of abatement:
Example 1: A freelance graphic designer earns $50,000 in a year from various clients. Since there is no tax withholding, they must calculate their estimated tax based on their previous year's tax return and make quarterly payments to avoid penalties.
Example 2: An individual receives $10,000 in dividends from investments. They must also make estimated tax payments on this income, as it is not subject to withholding (hypothetical example).