Most employees have income taxes withheld on at least a monthly basis. The IRS expects that you will pay at least a portion of your taxes throughout the year. If you are not having income tax withheld from your paycheck, the IRS expects you to file quarterly estimated tax. If you owe too much money at the year of the year, you may be fined.
The most simple and easy way to make sure you are paying federal and state (if applicable) income tax throughout the year is to have them withheld from your paycheck. To have income tax withheld, you will need to submit a W-4 form to your payroll office.
Some payroll offices may not withhold tax from non-compensatory pay, even if you ask. In this case, you may need to file quarterly estimated tax.
To determine if you need to file estimate tax payments and to calculate your payments if you do, use the Estimated Tax Worksheet in Form 1040-ES (page 7) or Publication 505 Worksheet 2-1 (p. 35). You will project your income for the year and do a rough estimate of the taxes you will owe at the end of the year. Each quarter, you will submit a payment to the IRS in lieu of withholding.
If you will owe less than $1,000 in additional tax for the year or meet some other criteria based on your previous year’s return you will not be fined for not making estimated tax payments. (See Do You Have to Pay Estimated Tax? for a questionnaire or Publication 505 Figure 2-A for a flow chart (p. 23).)
We at Personal Finance for PhDs are not tax professionals, and none of the content in this section should be taken as advice for tax purposes.
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