8572 / Who must pay the estimated tax and are penalties imposed for underpayment of the tax?

Subject to the potential imposition of penalties, any taxpayer who expects to owe tax of $1,000 or more is required to make estimated tax payments.¹ In other words, a taxpayer should project the current year’s taxable income, tax and credits based on expected income, deductions, etc. Based on “a pay as you go” method, estimated tax payments are payable periodically throughout the year. For this purpose, tax liability includes regular income tax, alternative minimum tax and self-employment tax (Social Security and Medicare tax).²

For self-employed taxpayers, the requirement to make estimated payments is more problematic than for employees. Unlike employees, no part of a self-employed individual’s compensation is withheld by the payor and paid over to the IRS for taxes. Moreover, in addition to regular income tax, these taxpayers are required to pay the full 15.3 percent of the Social Security and Medicare tax. For this reason, a self-employed individual with even a modest amount of income who may owe little or no income tax, may, nonetheless have a significant Social Security and Medicare tax liability.

However, even employed individuals who are subject to withholding should consider making estimated payments under the following circumstances:

The amount being withheld by the employer is insufficient.

The taxpayer has a significant amount of other income such as dividends, interest, rent, etc. that is not subject to withholding.