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Today is not only the deadline for filing taxes, it’s also the due date for the first quarterly estimated tax payment of 2007. Technically, federal income tax is a pay-as-you-go tax, meaning that you’re supposed to pay into the system as you receive income during the year. For a regular job, this usually isn’t a problem, as your tax withholding will take care of it. But in the case of self-employment income (or any other income that isn’t subject to withholding) you’ll need to file estimated taxes.
Estimated taxes can be figured using Form 1040-ES, and you can either pay a lump sum up front, or you can make quarterly payments (see: Important 2007 Tax Filing Deadlines for due dates). The problem here is that, if you don’t pay enough in over the course of the year, the IRS can penalize you.
In general terms, you’ll be subject to an underpayment penalty unless the total of your annual withholding and credits exceeds:
(1) 90% of the total tax owed for the year in question, or
(2) 100% of the tax shown on your previous year’s tax return
That being said, there are circumstances under which #2 becomes 110% of the tax shown on your previous year’s return (see Form 1040-ES for details).
If you’re not going to hit these thresholds via withholding, then you’ll need to make estimated tax payments. Keep in mind that estimated taxes can be paid all at once, or you can choose to file quarterly. But if you file quarterly, the IRS will expect to see approximately equal payments across quarters (although there are exceptions if your income is uneven). Keep in mind that you you don’t necessarily have to pre-pay your full tax bill. Rather, hit the thresholds above and you should be in the clear. Of course, you’ll have to pay the balance due when it comes time to file your taxes next year.
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