Estimated Tax Payment
IntermediateAn estimated tax payment is a payment of tax made during the year, usually in instalments, on income that does not have tax taken off at source, such as self-employment profits or investment income. The term is used mainly in the United States.
Employees usually have tax withheld from each paycheck. People with other income, such as freelancers, business owners, landlords and investors, often have little or no tax withheld. To keep tax collection on track during the year, the US federal system requires them to pay estimated tax, typically in four instalments.
For example, a freelance designer who expects to owe 12,000 in federal tax for the year might pay about 3,000 at each quarterly deadline, then settle any difference when filing the annual return.
Paying too little during the year can lead to an underpayment penalty, even if the full amount is paid when the return is filed. The rules include safe harbours, which let taxpayers avoid the penalty if their payments reach a set share of the current or previous year's tax.
Other countries have similar systems with different names. In the United Kingdom, self-employed people make payments on account twice a year, and in Australia, many taxpayers pay quarterly instalments.
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