Form 1040-ES

What is Form 1040-ES?

Form 1040-ES is an IRS form used to estimate and pay taxes on income that is not subject to any form of tax withholding. It helps individuals stay up to date on their tax payment obligations by paying taxes every quarter while avoiding underpayment penalties.

Who needs to file Form 1040-ES?

Self-employed individuals, freelancers, contractors, retired individuals, and landlords in the United States who earn income not subject to tax withholding—such as business income, rental income, interest, dividends, or other side income—must file Form 1040-ES if they expect to owe $1,000 or more in taxes. If their tax withholding and credits are less than 90% of their current year’s tax or 100% of their previous year’s tax, they may need to make estimated tax payments.

How can individuals calculate estimated tax under Form 1040-ES?

Form 1040-ES comes with a worksheet that allows individuals to estimate their total expected tax. Here are the steps to follow:

Add income from all the sources that don’t have any tax withholding.
Subtract deductions like standard deductions, retirement contributions, or other business expenses that may apply to your income. This will give you the total income on which tax is calculated.
Calculate your total tax amount using the IRS tax rate schedule, which is a table that shows how much tax individuals must pay based on their income.
Subtract any tax that may have already been paid through salary tax withholding or tax credits.
Divide the total tax liability into four payments so that you can pay them every quarter.

When should Form 1040-ES be filed?

Form 1040- ES should be filed on the following dates:

First payment: April 15
Second payment: June 15
Third payment: September 15
Fourth payment: January 15

What information is required under Form 1040-ES?

Form 1040-ES requires the following information:

Personal information includes personal details like name, address, and SSN number, along with other basic information.
Expected income for the year is the total income earned from all sources.
Tax deductions refer to any deductions that may reduce the taxable income.
Tax credits are amounts given by the government to eligible individuals. These are based on income, expenses, or personal circumstances. Tax credits directly lower the total tax payable.
Total expected tax liability is calculated with the help of the IRS tax schedule.
Expected tax withholding refers to any withholding that may have been withheld from the income previously.

Does Form 1040-ES apply to salaried individuals, too?

Yes, in some cases, Form 1040-ES can apply to salaried individuals. For most salaried employees, employers withhold taxes from their wages, which are reported on Form W-2. However, if they have additional income from freelancing, investments, rental income, or capital gains, or if the tax withheld from their salary is not enough to cover their total tax liability, they may need to make estimated tax payments using Form 1040-ES. This generally applies if they expect to owe at least $1,000 in tax after subtracting withholding and credits, or if their withholding covers less than 90% of the current year’s tax or 100% of the previous year’s tax.

What is the base amount that needs to be paid to avoid penalties?

The safe harbor rules state that, in order to avoid underpayment penalties, applicable individuals need to pay the smaller amount of 90% of the current year's tax liability or 100% of last year's tax liability through withholding and estimated tax payments. However, if the adjusted gross income exceeds $150,000, then individuals need to pay 110% last year's tax liability.

What is the difference between Form 1040 and Form 1040-ES?

While Form 1040 is a tax return form that employees file annually to report their total income, deductions, credits, total tax, and more, Form 1040-ES is used to estimate and pay taxes on income that is not subject to any withholding.