[Individual]What's withholding and estimated tax (Jan-30-2011, 79 days left)

The federal income tax is a pay-as-you-go tax. There are two ways to pay your tax.

First, Withholding. If you are an employee, your employer may withhold your income tax and pay to the IRS in your name.

Basically, the amount of your withholdings depends on two things:

• The amount you earn in each payroll period.
• The information you give your employer on Form W-4.

W-4 includes 4 types of information that your employer will use to figure out your withholding.

--Withhold at single rate or lower married rate.

--Withholding allowances (each allowances reduce the amount withheld).

--Any additional amount withheld.

--Any exemption from withholding.

Second, Estimated tax. You need to pay tax on income that is not subject to withholding as an estimated tax. Generally, the income includes from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. You may also have to pay estimated tax if your withholding tax from your salary, pension, or other income is not enough.

Here I use a table to elaborate which is subject to withholding and which is subject to estimated tax.

Income subject to Withholding	Income subject to Estimated tax
Salaries and wages Tips (exclude allocated tips) Taxable fringe benefits Sick pay Pensions and annuities Gambling winnings Unemployment compensation Certain federal payments, such as social security Backup withholding on interest, dividends, and other payments	Income from self-employment Interest Dividends Alimony Rent Gains from the sale of assets Prizes Awards

PSQ

Source: http://www.irs.gov