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Tax FAQ:

Withholding & Estimated Taxes

Understand Withholding & Estimated Taxes and learn how proper payments can help prevent unexpected tax balances.

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Withholding & Estimated Taxes

Backup withholding is a federal tax withholding requirement that may apply to certain payments when the IRS requires the payer to withhold tax from the payment and send it to the IRS on the recipient’s behalf.

Backup withholding can apply when certain tax-reporting requirements are not met, such as when a taxpayer fails to provide a correct taxpayer identification number or when the IRS notifies a payer that backup withholding is required.

Certain payments, such as interest, dividends, broker payments, and other specified payments, may be subject to backup withholding when the applicable requirements are met.

The federal backup withholding rate is generally 24% for payments subject to backup withholding.

The payer or IRS may notify you if backup withholding is required. You should also make sure your taxpayer identification information is accurate and properly provided to payers.

The steps depend on why backup withholding was imposed. You may need to provide a correct taxpayer identification number, resolve an IRS notice, or take another action required under the applicable rules.

Yes. Backup withholding is generally reported as federal income tax withheld. If the amount withheld exceeds your overall tax liability, you may receive the excess as part of your tax refund.

Backup withholding is generally reported as federal income tax withheld based on the information provided on your applicable Forms 1099, W-2, or other tax documents.

Not necessarily. Backup withholding is generally a method of collecting tax in advance. The amount withheld is credited toward your federal tax liability.

Review the notice or tax document you received and determine why withholding occurred. If the information is incorrect, contact the payer and, when necessary, the IRS to resolve the issue.

Estimated taxes are periodic tax payments made during the year toward income tax and, in some cases, self-employment tax when taxes are not sufficiently collected through withholding.

Individuals, businesses, and other taxpayers may need to make estimated payments when they expect to owe enough tax that withholding and other credits will not cover their tax liability.

Many self-employed individuals need to make estimated tax payments because they generally do not have an employer withholding federal income and employment taxes from their business income.

Estimated payments are generally based on expected income, deductions, credits, tax liability, and withholding for the year. Taxpayers may use the applicable IRS estimated-tax calculation procedures to determine their payments.

Estimated tax payments are generally made four times during the year. The exact due dates can vary when a normal deadline falls on a weekend or holiday.

Yes. Taxpayers have several options for making federal tax payments electronically, including IRS-approved online payment methods.

You may owe additional tax when you file your return and may also be subject to an estimated tax underpayment penalty if you did not meet the applicable safe-harbor or payment requirements.

Yes. Taxpayers can generally adjust subsequent estimated payments when their income, deductions, withholding, or tax circumstances change.

Not necessarily. Payments may vary when income is received unevenly during the year or when a taxpayer’s tax circumstances change. Special rules can apply to taxpayers with uneven income.

Estimated tax payments are generally credited toward your annual tax liability. If your total payments exceed the tax you ultimately owe, you may receive a refund.

Quarterly estimated tax payments are periodic payments made during the tax year toward an individual’s or business’s expected federal tax liability.

Taxpayers who expect to owe enough tax after withholding and credits may need to make estimated payments. This commonly includes self-employed individuals, independent contractors, investors, landlords, and business owners.

Federal estimated tax payments generally have four annual payment periods. The exact due dates should be checked for the specific tax year because weekends, holidays, and special circumstances can change deadlines.

The amount depends on your expected annual tax liability and the amount of tax being paid through withholding and other credits. Safe-harbor rules may help taxpayers determine the amount needed to avoid an underpayment penalty.

Generally, taxpayers subject to estimated tax requirements should make payments during the year rather than waiting until the tax return is filed. Waiting can result in underpayment penalties.

You may be subject to an underpayment penalty depending on the amount and timing of your payments. You should generally make the missed payment as soon as possible and adjust future payments if necessary.

Yes. Federal estimated payments can generally be made electronically through IRS payment options.

Yes. If your income or deductions change significantly, you can generally recalculate your expected annual tax and adjust future estimated payments.

Certain businesses may need to make estimated federal tax payments, depending on their entity structure and expected tax liability. Individual owners of pass-through businesses may also have personal estimated tax obligations.

You may be able to avoid the penalty by meeting applicable payment safe harbors, such as paying enough tax through withholding and timely estimated payments based on the applicable prior-year or current-year tax rules.

Tax underpayment occurs when the amount of tax paid during the year is less than the taxpayer’s required tax liability or required periodic payments.

Common causes include insufficient wage withholding, unexpected income, self-employment income, investment gains, bonuses, retirement distributions, or inadequate estimated tax payments.

An estimated tax underpayment penalty may apply when a taxpayer did not pay enough tax throughout the year through withholding or estimated payments and does not qualify for an applicable exception or safe harbor.

Taxpayers can compare their required annual payment with the amount paid through withholding and timely estimated payments. The IRS provides forms and worksheets that can be used to calculate potential underpayment penalties.

Potentially. A taxpayer can have an estimated-tax underpayment penalty for certain periods even if the taxpayer ultimately receives a refund after filing the annual return.

In certain circumstances, taxpayers may qualify for an exception or penalty relief. Eligibility depends on the reason for the underpayment and the applicable IRS rules.

Increasing withholding can help prevent future underpayments. In some circumstances, withholding is treated differently from estimated payments for penalty purposes, so the timing of withholding can be important.

Recalculate your expected tax liability and consider increasing withholding or making larger future estimated payments. Addressing the issue before the end of the year may reduce the potential penalty.

No. Underpayment issues can arise with federal, state, and local taxes. Each tax authority has its own rules and requirements.

Review your tax liability before and during the year, update wage withholding when appropriate, make timely estimated payments, and consider year-end tax planning when your income changes.

Tax withholding is the amount of money withheld from certain payments, such as wages, and sent to the government as an advance payment toward the taxpayer’s tax liability.

An employer generally withholds federal income tax from an employee’s wages based on information provided by the employee and applicable withholding tables and sends the withheld amount to the IRS.

Form W-4, Employee’s Withholding Certificate, is used by employees to provide information to their employer for determining the appropriate amount of federal income tax to withhold from wages.

Yes. Employees can generally submit an updated Form W-4 to their employer when their personal or financial circumstances change.

A refund can occur when your total payments and withholding exceed your final tax liability for the year.

Withholding is an estimated payment toward your annual tax liability. If insufficient tax was withheld during the year, you may still owe a balance when you file your return.

You can generally submit a new Form W-4 to your employer and request additional federal income tax withholding from your paychecks.

You may be able to reduce withholding by submitting an updated Form W-4 that accurately reflects your applicable circumstances. You should avoid claiming information that you do not qualify for.

Self-employed individuals generally do not have traditional employer withholding on their business income. They may need to make estimated tax payments instead.

Compare your expected annual tax liability with your projected withholding and other tax payments. Reviewing your withholding periodically can help prevent a large balance or unexpected underpayment penalty.

Withholding allowances were amounts used under the former federal Form W-4 system to help determine how much federal income tax an employer should withhold from an employee’s paycheck.

The federal Form W-4 was substantially redesigned beginning in 2020 and no longer uses withholding allowances in the same way the previous form did.

The W-4 was redesigned to make withholding calculations more closely reflect the taxpayer’s actual circumstances and to simplify the process of determining appropriate withholding.

The current federal W-4 generally uses information about filing status, multiple jobs, dependents, other income, deductions, and additional withholding to calculate federal income tax withholding.

No. The current federal Form W-4 does not use the old allowance system. Employees provide other information used to calculate withholding.

Changes to your filing status, dependents, multiple jobs, other income, deductions, or additional withholding can affect the amount withheld from each paycheck.

Yes. The term may still be used when discussing older W-4 forms, historical tax records, or state withholding systems that use different terminology.

Yes. Employees can generally submit an updated Form W-4 to their employer when they want to change their federal income tax withholding.

Claiming too many allowances could have resulted in insufficient federal income tax withholding and a larger balance due when filing the tax return.

Review your current Form W-4 information, compare your projected withholding with your expected annual tax liability, and update your withholding when your income or personal circumstances change.

 
 
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