As you know, you are required to prepay your income and employment taxes (collectively, "tax") during the course of the taxable year as your income is earned. To the extent taxes withheld from your income are not sufficient for this purpose, estimated tax payments must be made. Accordingly, if your income is substantially from wages, you may not be required to make estimated tax payments. On the other hand, it is likely you will have to pay estimated tax if you have significant self-employment or investment income.

When required, estimated tax payments are due on April 15, June 15, September 15 of the taxable year, and January 15 of the following year. If a due date falls on a Saturday, Sunday, or legal holiday, the payment date is extended to the next business day

The amount of any required installment of estimated tax is the smallest amount determined using three alternative methods. Under the first method, the amount of any required installment is equal to 22.5% of the tax shown on your tax return for the current taxable year. The payment under the second method is 25% of the tax shown on your return for the immediately preceding year (28% or, if the preceding taxable year begins in 2002 or later, 27.5% if your adjusted gross income on such prior year's return was more than $150,000 ($75,000 if you were married and filed a separate return)). The second alternative, however, cannot be used if you did not file a return for the preceding taxable year or if the preceding taxable year was not a 12-month period. In addition, the amount of any installment computed under either of the two alternatives described above must be increased by any saving realized by using the third method to compute any previous estimated tax installment for the taxable year (to the extent not previously recaptured).

If your income fluctuates during the taxable year, you may be able to reduce the amount of a required estimated tax payment by using the third alternative. Under this method, the amount of an installment payment is equal to the excess of 22.5% of the tax based on annualizing your income for the months in the taxable year preceding the due date for the installment multiplied by the installment number, over the aggregate amount of any prior required estimated tax payments for the taxable year.

In each case, the tax is computed without regard to the credit for taxes withheld at the source. Rather, such amounts are treated as payments of estimated tax.

Special rules apply in various situations, including with respect to farmers and fishermen, nonresident aliens, and short taxable years.

Failure to timely make any required payment of estimated tax will subject you to a penalty. The amount of the penalty is equal to the product of the amount of the underpayment, the period of the underpayment (but not beyond the due date of the return for the taxable year (without extension), when interest on any underpayment of tax would begin to run), and the interest rate on underpayments.

Notwithstanding the foregoing, no estimated tax payment is required with respect to a taxable year if your tax for the taxable year, after subtracting credits and taxes withheld, does not exceed $1,000. In addition, you do not have to pay estimated tax if you had no tax liability for the prior taxable year, the prior taxable year covered a 12-month period and you were a U.S. citizen or resident for the entire year. Although there is an additional exception where it would be "against equity and good conscience" (e.g., because of casualty, disaster, or other unusual circumstances) to impose the penalty or when you retire or become disabled, that should not be used as a planning device to compute your required payments.

Please feel free to call me if you have any questions or comments with respect to any of the foregoing.