Estimated tax is the method used to pay taxes on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

General Rule
You must pay estimated tax for 2007 if both of the following apply:

1. You expect to owe at least $1,000 in tax for 2007 after subtracting your withholding and credits.
2. You expect your withholding and credits to be less than the smaller of:

• 90 percent of the tax to be shown on your 2007 tax return, or
• 100 percent of the tax shown on your 2006 tax return. Your 2006 tax return must cover all 12 months.

Sole Proprietors, Partners, and S Corporation Shareholders
You generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return. Use Form 1040-ES (Estimated Tax for Individuals) to figure and pay your estimated tax. For additional information, refer to Publication 505 (Tax Withholding and Estimated Tax).

Corporations
You generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return. Use Form 1120-W (Estimated Tax for Corporations) to figure the estimated tax. You must deposit the payments. For additional information, refer to Publication 542 (Corporations).

Estimated Tax Not Required
You do not have to pay estimated tax for 2007 if you meet all three of the following conditions.

• You have no tax liability for 2006
• You were a US citizen or resident for the whole year
• Your 2006 tax year covered a 12-month period

You had no tax liability for 2006 if your total tax was zero or you did not have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505 (Tax Withholding and Estimated Tax).

How To Figure Estimated Tax
To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

When figuring your 2007 estimated tax, it may be helpful to use your income, deductions, and credits for 2006 as a starting point. Use your 2006 federal tax return as a guide. You can use 1040-ES (Estimated Tax for Individuals).

You must make adjustments both for changes in your own situation and for recent changes in the tax law.

When To Pay Estimated Taxes
For Estimated tax purposes, the year is divided into four payment periods. Each period has a (specific payment due date). If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.