Form 1040-ES: Estimated Tax for Individuals (2014)

What Form 1040-ES Is For

Form 1040-ES is used to calculate and pay estimated taxes on income that isn't subject to withholding throughout the year. Unlike employees who have taxes automatically deducted from their paychecks, many taxpayers must make quarterly payments to the IRS if they receive income from sources such as self-employment, freelance work, business ownership, interest, dividends, rental properties, or alimony. The form serves a dual purpose: it includes a worksheet to help you figure out how much estimated tax you owe, and it provides payment vouchers you can use when mailing checks or money orders to the IRS.

The U.S. tax system operates on a "pay-as-you-go" basis, meaning taxes must be paid as income is earned or received during the year. For those without employer withholding, estimated tax payments fulfill this requirement. The form also helps you account for other taxes beyond regular income tax, including self-employment tax (Social Security and Medicare for self-employed individuals) and alternative minimum tax. By making quarterly estimated payments, you avoid owing a large sum when you file your annual tax return and reduce the risk of underpayment penalties.

When You’d Use Form 1040-ES (Late/Amended Payments)

You must generally make estimated tax payments for 2014 if you expect to owe at least $1,000 in tax after subtracting withholding and refundable credits, and your withholding and credits will be less than either 90% of your 2014 tax or 100% of your 2013 tax (whichever is smaller). However, you're not required to pay estimated tax if you had no tax liability for all of 2013, were a U.S. citizen or resident alien for the entire year, and your 2013 tax year covered 12 full months.

If you discover you've made an error in estimating your income or if your financial situation changes during the year, you can amend your estimated tax payments at any time. To do this, you'll recalculate your total estimated tax using the worksheet in Form 1040-ES and adjust your remaining quarterly payments accordingly. For example, if you initially overestimated your income and realize you won't earn as much as expected, you can reduce future payment amounts. Conversely, if you receive unexpected income, you should increase subsequent payments to avoid underpayment penalties. If you make a payment late or skip a payment entirely, you may owe penalties even if you ultimately receive a refund when filing your annual return, though the IRS can waive penalties in cases of casualty, disaster, or other unusual circumstances.

Key Rules or Details for 2014

The estimated tax rules apply to U.S. citizens, resident aliens, and residents of U.S. territories. For 2014, several important thresholds and rules govern estimated tax payments. The general rule requires paying estimated tax if you expect to owe $1,000 or more after withholding and credits, and if your withholding will be less than the smaller of 90% of your 2014 tax or 100% of your 2013 tax. Special rules exist for certain taxpayers: farmers and fishermen need only pay 66⅔% instead of 90%, while higher-income taxpayers with adjusted gross income exceeding $150,000 in 2013 ($75,000 if married filing separately) must pay 110% of their prior year's tax rather than 100%.

The 2014 tax year brought several important changes affecting estimated tax calculations. The standard deduction amounts were $12,400 for married filing jointly, $9,100 for head of household, and $6,200 for single or married filing separately. The personal exemption amount increased to $3,950 for most taxpayers, though it could be reduced for those with higher incomes. The maximum earnings subject to Social Security tax rose to $117,000. Additionally, 2014 marked the first year taxpayers needed to report health care coverage status on their returns or face potential payments for lack of coverage. This health care responsibility payment could be estimated and included in quarterly payments. The IRS also cautioned that itemized deductions might be reduced for taxpayers with adjusted gross income above $152,525.

Step-by-Step (High Level)

The process of figuring and paying estimated tax begins with gathering your information, including your 2013 tax return and instructions, the 2014 Tax Rate Schedules, and the worksheets provided in Form 1040-ES. Using last year's return as a starting point, you'll estimate your expected adjusted gross income for 2014, accounting for any significant changes in your financial situation. Next, you'll estimate your deductions—either the standard deduction or itemized deductions—and multiply your personal exemptions by $3,950 to determine your exemption amount. Subtracting these amounts from your adjusted gross income gives you your taxable income, on which you'll calculate your tax using the appropriate tax rate schedule.

After calculating your base income tax, you'll add any alternative minimum tax and other taxes you expect to owe, such as self-employment tax. Then subtract any credits you're eligible for to arrive at your total estimated tax for the year. To determine whether you need to make estimated payments, you'll compare this amount to what will be withheld from other income sources (like a part-time job with withholding). If the difference is $1,000 or more, and you haven't met the safe harbor percentages mentioned in the key rules, you must make estimated payments. The total amount due is typically divided into four equal quarterly payments, though you can pay more frequently or pay the entire amount with your first payment.

The 2014 payment due dates are April 15, June 16, and September 15 of 2014, and January 15, 2015 (though you can skip the January payment if you file your 2014 return by February 2, 2015, and pay the full balance). You can pay online through IRS.gov, by phone using the Electronic Federal Tax Payment System or a credit/debit card service, or by mailing a check or money order with the appropriate payment voucher to the address listed for your state.

Common Mistakes and How to Avoid Them

One of the most frequent errors taxpayers make is significantly underestimating or overestimating their annual income when completing the estimated tax worksheet. If you estimate too low, you'll underpay your taxes and potentially face penalties; if you estimate too high, you'll essentially give the IRS an interest-free loan throughout the year. To avoid this, review your income situation regularly—at least before each quarterly payment—and use the annualized income installment method if your income varies significantly throughout the year, as is common for seasonal businesses or those with irregular capital gains.

Another common mistake involves miscalculating self-employment tax. Self-employed individuals must remember to multiply their net self-employment income by 92.35% (not 100%) before calculating the 15.3% self-employment tax (12.4% for Social Security on income up to $117,000, plus 2.9% for Medicare). Additionally, they can deduct half of their self-employment tax when figuring adjusted gross income, which many taxpayers forget. Forgetting to account for this deduction leads to overpayment of estimated taxes.

Married couples sometimes file joint payment vouchers when they shouldn't. If either spouse is a nonresident alien, if you're separated under a decree of divorce or separate maintenance, or if you have different tax years, you cannot make joint estimated tax payments. Each spouse must file separately. Similarly, individuals in registered domestic partnerships or civil unions that aren't recognized as marriages under state law cannot file joint estimated payments. Taxpayers also frequently send payments to the wrong address—the mailing address for estimated tax vouchers differs from the address where you send your completed annual tax return, and using the wrong address can result in processing delays or lost payments.

Finally, many taxpayers who change their names through marriage or divorce continue making estimated payments under their old names but forget to attach a statement to their annual return explaining the name discrepancy. This omission can cause the IRS to lose track of payments. To prevent this, report your name change to the Social Security Administration before filing your tax return, and attach a statement listing all estimated payments made during the year, showing both the names and Social Security numbers under which payments were made.

What Happens After You File

When you make estimated tax payments using Form 1040-ES, the IRS credits these payments to your account under your Social Security number. The IRS processes your payments and maintains a running record throughout the year. If you're making payments by check with the payment vouchers, processing typically takes several weeks. Electronic payments through the IRS website, phone systems, or the IRS2Go mobile app are generally credited within one to two business days. You can verify that your payments were received and properly credited by checking your online IRS account at IRS.gov/account, where you'll see your payment history and other tax records.

These estimated payments serve as prepayments toward your total tax liability for the year. When you file your annual Form 1040 tax return for 2014 (due April 15, 2015), you'll report the total amount of all estimated tax payments on the appropriate line. The IRS will then apply these payments toward your total tax liability for the year. If your estimated payments plus any withholding exceed your total tax, you'll receive a refund of the difference. Conversely, if you underpaid, you'll owe the remaining balance with your return. You'll also have the option to apply any overpayment to your 2015 estimated tax rather than receiving it as a refund.

If you didn't pay enough through estimated payments or paid late, the IRS will calculate an underpayment penalty after you file your return. This penalty is essentially interest charged on the underpaid amount for the period it remained unpaid. However, you won't face penalties if you owe less than $1,000 after subtracting withholding and credits, or if you paid at least the required safe harbor amount (generally 90% of the current year's tax or 100% of the prior year's tax, or 110% for higher-income taxpayers). The IRS typically calculates any penalty automatically and sends you a bill if you don't file Form 2210 with your return to compute it yourself. In some situations—such as casualties, disasters, or if you retired after age 62 or became disabled—you may request a waiver of the penalty.

FAQs

Can I pay all my estimated tax at once instead of making four quarterly payments?

Yes, you can pay your entire estimated tax liability by the April 15, 2014 deadline rather than spreading it over four quarterly payments. Many taxpayers prefer this approach if they have the funds available early in the year, as it simplifies recordkeeping. You can also make more than four payments if you prefer paying monthly or on another schedule, as long as the total paid by each quarterly due date meets the required amount. The IRS doesn't require exactly four payments—the quarterly system is simply the standard framework.

What if I increase my withholding from my job instead of making estimated payments?

If you also receive wages subject to withholding, you can avoid making estimated tax payments by having your employer withhold additional tax from your paycheck. To do this, complete a new Form W-4 with your employer and enter the extra amount you want withheld on the designated line. This approach is often simpler than making quarterly estimated payments, especially if you have a regular paycheck. The IRS treats withholding as if it were paid evenly throughout the year, which can help you avoid underpayment penalties even if the increased withholding doesn't start until later in the year.

How do I know if I qualify for the higher-income taxpayer exception?

You're considered a higher-income taxpayer for 2014 estimated tax purposes if your adjusted gross income on your 2013 tax return exceeded $150,000 (or $75,000 if your 2014 filing status will be married filing separately). If you fall into this category, you must base your required annual payment on 110% of your 2013 tax rather than 100%. This means if your 2013 total tax was $40,000 and your AGI exceeded the threshold, you'd need to pay at least $44,000 through estimated payments and withholding to avoid penalties, even if your actual 2014 tax turns out to be lower. This rule doesn't apply to farmers and fishermen.

What should I do if my income changes significantly during the year?

If you experience a substantial change in income, deductions, credits, or other tax factors after making one or more estimated payments, you should recalculate your estimated tax using a new Form 1040-ES worksheet. Then adjust your remaining quarterly payments to reflect your updated situation. For example, if you lose a major client or your business becomes seasonal, you might use the annualized income installment method to match your payment amounts more closely to when you actually earn income. This method can help you avoid underpayment penalties when income arrives unevenly throughout the year. You'll need to file Form 2210 with Schedule AI when you file your annual return to show that you used this method.

Do I need to make the January 15, 2015 payment?

You can skip the fourth quarterly payment (due January 15, 2015) if you file your complete 2014 tax return by February 2, 2015, and pay your entire remaining tax balance with that return. This option appeals to many taxpayers who can prepare their returns early, as it eliminates one estimated payment and allows you to calculate your exact tax liability rather than estimating. However, if you don't file by February 2, you must make the January payment to avoid potential underpayment penalties.

What happens if I completely forget to make estimated tax payments?

If you fail to make any estimated tax payments during the year, you'll likely owe an underpayment penalty when you file your annual return, calculated as interest on the amount you should have paid for each quarter. However, there are exceptions: you won't owe penalties if your total tax (after withholding and credits) is less than $1,000, if you had no tax liability in 2013 (as a U.S. citizen or resident for the full year with a 12-month tax year), or if your withholding covers at least 90% of your 2014 tax or 100% of your 2013 tax (110% for higher-income taxpayers). If you do owe a penalty, the IRS will typically calculate it and send you a bill after processing your return.

Where can I find payment vouchers if I lose mine or need additional ones?

If you need extra payment vouchers beyond the four included with Form 1040-ES, simply make photocopies of your unused vouchers. Fill in each copy completely with your name, address, Social Security number, and the payment amount, and mail it with your check or money order to the appropriate IRS address for your state. Alternatively, consider switching to electronic payments through IRS.gov, which eliminates the need for paper vouchers entirely. Electronic payments also provide immediate confirmation and reduce the risk of lost or delayed mail.

Sources: All information in this summary comes from official IRS publications, including the 2014 Form 1040-ES and instructions, About Form 1040-ES, and the IRS Estimated Taxes guidance page.

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