Since the federal government started requiring income tax withholding, people who have income from sources that do not withhold federal income taxes have to make estimated tax payments. This is because the federal government's income tax is structured to be a pay as you go system, meaning as you earn money you have to pay taxes. At the end of the year, you will receive a refund if you overpay. The Internal Revenue Service lets you choose one of two methods of determining how much you have to pay in income tax withholding. This way, you can avoid tax penalties and interest.
Find your tax liability from your previous year's income tax return. If you did not have any tax liability in the previous year, you are not required to make quarterly tax payments.
Locate your adjusted gross income for the previous year from your tax return. On Form 1040, this amount can be found on line 37. If this amount exceeds the amount required to be considered a higher-income tax payer, you must multiply your tax liability by 1.1 to find the amount you have to pay over the course of the year, instead of using your prior year's tax liability as the total amount to pay.
As of 2010, the high-income taxpayer amount equals $150,000 ($75,000 if married filing separately). For example, if your income equals $200,000 and you had a tax liability of $20,000, you would multiply $20,000 by 1.1 to find you must make $22,000 in estimated tax payments over the course of the year, based on your prior year's income.
Select either 90 percent of the income taxes you expect you will owe or the result from Step 2 as the total amount you have to pay over the course of the year. For example, if you expect to owe $10,000 in federal taxes this year but only paid $6,000 in income taxes last year, you can meet your withholding requirement by paying just $6,000.
Divide the amount you must pay over the course of the year by four to find the amount you have to pay each quarter. For example, if you had to pay $6,000 to satisfy your tax withholding requirements, you would divide $6,000 by four to find each quarterly payment is $1,500.
Most people use their prior year's income tax liability rather than estimating their current year's anticipated liability to determine their quarterly tax payments, because it provides a fixed dollar amount that must be paid over the course of the year. If you are using the current year's expected income and your income goes up, you might end up owing penalties for not paying enough.